Haugesund Kommune & Anor v Depfa ACS Bank & Anor

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. (Footnote: ¹) The fact that local authorities had entered into speculative transactions to make money caused a stir in some circles at the time. The resulting litigation also led to great developments in the English law of restitution, particularly at the hands of Lord Goff of Chieveley.

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.

This appeal from the judgment of Tomlinson J 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 appellants, as “Haugesund” and “Narvik”, and to them collectively as “the Kommunes”. I will refer to the 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 “WR”. It advised Depfa on various aspects of the “swaps” contracts before they were concluded. For present purposes the key issue on which WR 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 (“the 1992 Act”), 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.) WR 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.

The “swaps” contracts were arranged through a Norwegian financial adviser called Terra Fonds AS, later named Terra Securities ASA (“Terra”), which has since gone into insolvent liquidation. The contracts were concluded in June 2004 (with Haugesund) and September 2005 (with Narvik). Essentially, Depfa agreed to advance to the Kommunes a capital sum, which was equivalent to the net present value of income that each of the Kommunes expected to receive from certain sources (Footnote: ²) over an eight or twelve year period. Under the contracts Depfa advanced NOK 231,300,000 to Haugesund and NOK 190,000,000 to Narvik. Payment of those “Fixed Amounts” was the full extent of Depfa’s liability in each case. Under each of the “swaps” contracts the Kommunes were obliged to make fixed quarterly payments over the period of the agreement. The payments consisted mainly of interest but included a small amount of amortisation. Then at the end of the fixed period of the agreement, the Kommunes had to make a “bullet” repayment, which comprised the outstanding interest and principal. Depfa’s payment and the Kommunes’ quarterly and “bullet” repayments were respectively described in the contracts as the “first” and “second” “Fixed Amount”. The agreements were called “zero coupon swaps agreements” because Depfa paid no interest, so its “coupon” was zero.

The Kommunes, upon the advice of Terra, invested the sums advanced by Depfa in financial instruments. The investments proved disastrous. 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 NOK 125 million; Narvik’s loss was about NOK 142 million. At current exchange rates the combined losses of the Kommunes on their investments total about £26.7 million. 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.

It will be immediately obvious that none of the parties involved in this débacle has anything to do with England and Wales. 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. Before the judge, it was common ground that the issue of the “capacity” or “power” of the Kommunes to conclude the “swaps” contracts in the light of the provisions of the1992 Act, especially section 50, involved questions of Norwegian law, as well as English law. It was (and is) agreed that all questions of the actual authority (Footnote: ³) of officers of the Kommunes to conclude the contracts are governed by Norwegian law.

Depfa counterclaimed, alleging that the “swaps” contracts were valid and enforceable. But if they were not, then Depfa claimed in restitution for the return of the sums advanced to the Kommunes. It is common ground that the restitution counterclaims are governed by English law.

Depfa joined WR as a Third Party to the litigation. WR did not contest the jurisdiction of the English court. Depfa claimed damages against WR for any losses it suffered as a result of what it claimed was WR’s negligent advice in relation to the capacity or power of the Kommunes to enter the “swaps” contracts. Although that claim is governed by Norwegian law, it was agreed before the judge that the relevant Norwegian law is no different from that of England and Wales, save that Depfa could only bring a claim for breach of a contractual duty to give careful advice. There is no Norwegian equivalent to a parallel tortious duty to take care, at least not on the facts of this case.

The trial on liability was expedited and took place before Tomlinson J over 11 days in April and May 2009. The judge heard evidence from witnesses of fact and also three experts on Norwegian law. He handed down his reserved judgment on 4 September 2009.

The relevant conclusions of Tomlinson J in his judgment of 4 September 2009 are: (1) the “swaps” contracts constituted loans within the meaning of section 50 of the 1992 Act. (Footnote: ⁴) (2) The effect of section 50 of the 1992 Act was that the Kommunes lacked the substantive power under Norwegian law to enter into the “swaps” contracts. That lack of substantive power was to be characterised, in English legal terminology, as a lack of capacity to conclude the “swaps” contracts. (Footnote: ⁵) (3) Accordingly, the “swaps” contracts were void according to their putative applicable law, viz. English law. (Footnote: ⁶) (4) The “swaps” contracts were also void for want of authority on the part of the individuals of the Kommunes who entered into the contracts. (Footnote: ⁷) (5) Depfa had not taken the risk that the “swap” contracts might be void; instead Depfa had relied on the advice of WR. (Footnote: ⁸) (6) Therefore, the Kommunes were entitled to declarations that the “swaps” contracts were void. (Footnote: ⁹) (7) However, this was, as the judge put it, a Pyrrhic victory, because Depfa was entitled to recover, in restitution, the full amount of the principal sums that had been advanced by Depfa under the “swaps” contracts, plus interest. (Footnote: ¹⁰) (8) The Kommunes could not rely on a defence of “change of position”, based on their bona fide investment of the sums advanced under the “swaps” contracts and the losses suffered on those investments by the adverse turn in the markets. (Footnote: ¹¹) (9) The Kommunes were therefore legally obliged to make restitution in full of the sums that they had received from Depfa, although they were given credit for the sums that they had received upon redemption of the investments and which the Kommunes had actually repaid to Depfa. (Footnote: ¹²) (10) The advice that WR had given to Depfa was advice that no reasonably competent Norwegian lawyers could have given. (Footnote: ¹³)

In a further judgment of 1 October 2009, Tomlinson J held that Depfa had not been contributorily negligent with regard to the advice given by WR or its consequences. Issues of damages between Depfa and WR were reserved for a further trial, if necessary.

The judge’s order of the same date declared: (1) the “swaps” contracts were void; (2) the Kommunes must repay the sums advanced plus interest; and (3) WR was liable to Depfa for damages which were to be assessed. The judge gave WR permission to appeal his decision that the Kommunes lacked capacity to agree the “swaps” contracts. I will call this first issue “the validity issue”. (Footnote: ¹⁴) The judge also gave permission to the Kommunes to appeal his conclusion that they could not rely on a “change of position” defence to Depfa’s claim in restitution. I will call that “the change of position issue”.

There was a trial of the WR/Depfa damages issue in January 2010 and Tomlinson J handed down his judgment on that issue on 12 February 2010. By the time of the second trial it was made clear that Depfa claimed from WR the whole of the losses it suffered as a result of WR’s negligent advice, not just any sums Depfa was unable to recover from the Kommunes. This was because there was doubt on whether Depfa could enforce its judgment against the Kommunes. Depfa said that it was not obliged to pursue its rights against the Kommunes and was entitled to recover its outstanding loss in full against WR. The parties agreed in principle that Depfa was entitled to recover from WR the principal sum paid over to the Kommunes plus compound interest; those damages represented the cost and therefore loss to Depfa of funding the sums advanced to the Kommunes. It was also agreed that WR was liable to pay Depfa its costs of the action and its counterclaim against the Kommunes. The remaining issue in dispute was therefore whether Depfa was legally obliged to give WR credit for the value of its rights in restitution against the Kommunes as found by the judge. Tomlinson J held that it was not. Depfa was thus entitled to judgment against WR for the full amount of the sums advanced to the Kommunes plus compound interest. However, as the Kommunes had already paid over to Depfa the net sums recovered from the sale of the investments, Depfa agreed that it should, in practice, give WR credit for those sums.

The appeal and the cross-appeal were heard by us on 15, 16 and 17 February 2010. We reserved judgment.

There are four conclusions of the judge that are challenged on this appeal. Three concern the topics on which he gave permission to appeal. The fourth arises out of discussion in the course of the hearing before us, although it is intimately connected with one of the issues for which permission was given. Logically, the first issue to be considered is whether the judge was correct to conclude (Footnote: ¹⁵) that the Kommunes lacked the “capacity” to enter into the “swaps” contracts, with the consequence that they were void as a matter of their applicable law. Tomlinson J held, following the long-standing Rule in Dicey, Morris & Collins on The Conflict of Laws (Footnote: ¹⁶) 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 issue of their “capacity” or “powers” to conclude the “swaps” contracts are therefore governed by Norwegian law. (Footnote: ¹⁷) 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.

As a result of the various decisions of the judge, WR is the party that is presently bearing the net losses suffered because of the Kommunes’ disastrous investments. Therefore, Mr Pollock QC, for WR, took the lead in arguing this first point. He challenges principally the judge’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. (Footnote: ¹⁸)

There is a subsidiary issue under this first heading, which arises only if we accept Mr Pollock’s argument on “capacity” or “powers”. Mr Iain Milligan QC, for the Kommunes, relies on the judge’s conclusion that even if the Kommunes had the capacity to conclude the contracts, the individuals who purported to enter them on behalf of the Kommunes did not have authority to do so, with the consequence that they are void. (Footnote: ¹⁹) Mr Pollock submits that, at the time the resolutions were passed, if the Kommunes had the capacity to enter into the contracts, then the officials must have had actual authority under Norwegian law. He also submits that, in any event, the officials had ostensible authority, an issue which is governed by English law.

The second issue arises if this court concludes that the judge was correct to hold that the “swaps” contracts are void because the Kommunes did not have the “capacity” to enter them or, even if they did have “capacity”, there was no authority to conclude them. The next question is: what is the scope of the restitutionary remedy available to one legal entity that has parted with money to another legal entity under a loan, or, as the cases sometimes put it, a “borrowing contract”, which is held to have been void because it was outside the “capacity” of the borrower to conclude the contract?

The way this point arises needs some explanation. Mr Milligan emphasises that the judge found that the “swaps” contracts were “loans” for the purposes of the 1992 Act; (Footnote: ²⁰) in short, they were “borrowing contracts”. In reviewing the authorities on the scope of the restitutionary remedies available to a legal entity that has passed money to another legal entity under a void contract and the scope of the defence of “change of position” to such a claim, Mr Milligan drew our attention to the House of Lords’ decision in Sinclair v Brougham. (Footnote: ²¹) That case concerned contracts of loan, by depositors, which had been made ultra vires the capacity of the Birkbeck Permanent Benefit Building Society. The House of Lords held, unanimously, that the depositors had no right at law, in “quasi-contract”, to reclaim the money loaned as money “had and received” by the Building Society; such a right would depend upon the creation of an implied contract and that would have the effect of revalidating the contract which had been held to be void. (Footnote: ²²) However, the subsequent case of Westdeutsche Landesbank Girozentrale v Islington London BC, (Footnote: ²³) (hereafter “WLG”) regarded Sinclair v Brougham as authority for the proposition that in circumstances where a “borrowing contract” was held to be void because ultra vires the borrower, equity could impose a resulting trust on the moneys lent, thereby providing a restitutionary remedy in equity, thus enabling the lender to recover the sums lent to the borrowing party even if no such remedy existed at law.

WLG was one of the cases in which a bank wished to recover sums advanced to a UK local government under an “interest rate swaps” contract which was held to be void because ultra vires the council. The Court of Appeal had held (Footnote: ²⁴) that the contract was not a “borrowing contract” and that the bank was entitled to recover the balance advanced to the local authority at law, as money “had and received”. It also held that it was bound by Sinclair v Brougham, so that the bank was also entitled to recover the balance in equity, because the local authority held the money advanced on a resulting trust and was therefore personally liable, as trustee, to repay the bank. The Court of Appeal further held that, as trustee of the sum advanced, the local authority had to pay compound interest on the balance held from the date of receipt of the money.

When the case got to the House of Lords the only remaining issue was whether the bank was entitled to have simple or compound interest on the sums reclaimed in restitution. It was common ground before their Lordships that compound interest could only be claimed if there was a right in equity to a restitutionary claim for the money that had been advanced by the bank. But if the restitutionary claim for the money was a common law claim only, then just simple interest could be claimed. The House held, by a majority, that the bank could only claim simple interest. In doing so, it departed from its earlier decision in Sinclair v Brougham.

Mr Milligan’s submission, which was somewhat half-hearted at first, but which he later advanced more forcefully, perhaps after encouragement from me, is that in WLG, the majority of the House of Lords did not depart from its earlier decision in Sinclair v Brougham on the one issue that matters in this case. This is whether, in the instance of a “borrowing contract”, or contract of loan, which is void because ultra vires the borrower, the lender can have a personal claim in restitution, ie. one at law; or whether it would be contrary to public policy to allow such a claim, as their Lordships had held in Sinclair v Brougham itself. Mr Milligan submits that Lord Goff, Lord Woolf and Lord Slynn declined to depart from Sinclair v Brougham on this point. He therefore submits that we are still bound to follow Sinclair v Brougham and hold that because the “swaps” contracts are loan contracts, Depfa cannot, as a matter of law, recover any of the money that it paid out to the Kommunes pursuant to them. As I understand it that point was not taken before the judge, but, as it is a pure point of law and as it raises an issue of precedent, there was no more than muted objection from Mr Pollock or Mr David Railton QC, for Depfa, to the point being argued before us. I have called that issue the “restitution in loan contracts” issue.

The third issue concerns the scope of the defence of “change of position” in a claim in restitution. Mr Milligan challenges the judge’s conclusion (Footnote: ²⁵) that the Kommunes could not rely on the defence of “change of position” and he does so on two grounds. First, he submits that the judge wrongly ignored the purpose or policy of section 50 of the 1992 Act, which was to protect Kommunes, and hence their citizens, from the consequences of borrowing money for prohibited purposes, because the value of the money borrowed may be lost and it would be future generations who have to pay to regain the value. Therefore, to fulfil this policy or purpose, the just and equitable obligation of the Kommunes must be to put them in the position they would have been if the loans had not been made at all, but taking account of what has happened since, viz. their losses on the subsequent investments, which were concluded in good faith. This first point was dubbed “the policy issue”.

Secondly, Mr Milligan submits that the judge misapprehended the effect of the authorities on “change of position”. The correct starting point is to look at the position the Kommunes would have been in had no money been paid to them at all and then to see what they have done, in good faith, as a result of receiving the money which they would not otherwise have done. The answer is that they invested it, in accordance with advice from Terra. Therefore there has been a change of position, in good faith. The consequence is that it is just and equitable that Depfa should now only be entitled to recover the net value of the investments that the Kommunes made in good faith. Mr Milligan submits that the judge was wrong to conclude (Footnote: ²⁶) that the position in this case was indistinguishable from that in the Privy Council decision in Goss v Chilcot. (Footnote: ²⁷) He also argued that we should not follow that case.

In order to deal with these issues, it will be necessary to examine the judge’s findings on the legal status of the Kommunes and the scope and interpretation of the 1992 Act. The parties also invited us to look at some of the expert evidence that was before the judge on the powers of the Kommunes.

The conflict of laws rules that govern the legal capacity of companies and other bodies corporate or unincorporate with regard to contracts are outside the scope of the Rome Convention, which was given the force of law in the UK by The Contracts (Applicable Law) Act 1990. (Footnote: ²⁸) Such issues are therefore governed by English common law conflict rules. As already noted, Tomlinson J considered this issue by reference to the English conflict of laws rule as stated in Dicey, Morris and Collins, at Rule 162(1) and (2): (Footnote: ²⁹)

“(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”.

The Kommunes’ contention now, as before the judge, is that the “swaps” contracts are void because of a lack of “capacity” in the Kommunes to enter into them. The judge’s conclusion of law that this is so must be the result of two stages of enquiry. The first stage poses the question: what is the “capacity” of the Kommunes to enter into the “swap” contracts. The judge decided that issue by examining the sources of the “power” of the Kommunes according to Norwegian law and, in particular, by analysing the effect of the 1992 Act, especially section 50. Having concluded that the Kommunes lacked the “substantive power” to enter into the “swaps” contracts, he held that this lack could “only properly be characterised as going to capacity”, therefore “in English terminology [the Kommunes] lacked capacity” to enter into the “swaps” contracts. (Footnote: ³⁰)

The judge then went on to the second stage of the enquiry, which involves looking at English law, that being the applicable law of the “swaps” contracts. He held (as he had to) that this lack of capacity in the Kommunes had the inevitable consequence in English law that the contracts were invalid. The judge held that the fact that Norwegian private law had a theory which permitted a third party in certain circumstances to enforce a contract made with a municipality which lacked the power to make it was irrelevant. That was because the effect of the lack of “capacity” on the validity of the contract had to be determined by its putative applicable law, which in this case was English law. (Footnote: ³¹)

None of the parties challenge the rule as stated in Dicey. Mr Pollock accepts that the Kommunes come within the concept of a “corporation” for the purposes of this rule, although it will be necessary to consider what is embraced by that concept. Mr Pollock’s attack on the judge’s conclusion that the Kommunes lacked the “capacity” to enter into valid “swaps” contracts focuses on the first stage, viz. what is meant by the Kommunes’ “capacity” within Dicey’s rule. Mr Pollock argues that the judge went wrong in several respects on this part of the case. First, the judge impermissibly interchanged “capacity” and “power” when analysing the legal “capacity” of the Kommunes for the purposes of the Dicey rule. Secondly, he failed to examine sufficiently closely the constitutions of the Kommunes to determine what was their “capacity” to enter the “swaps” contracts. Thirdly, the judge did not properly appreciate that the reason that the Kommunes were unable to conclude the “swaps” contracts was not their incapacity to do so by virtue of their constitutions, but because section 50 of the 1992 Act makes it effectively unlawful for a Kommune to enter into such a contract. But, as Mr Milligan accepted, that would be irrelevant, because these are (at least putatively) English law contracts and a foreign law prohibition does not affect their validity or effect. (Footnote: ³²) Fourthly, therefore, in Mr Pollock’s submission, the judge was wrong to conclude that the Kommunes’ lack of substantive power could only be characterised, in English terminology, as a lack of capacity to conclude the “swaps” contracts. This mistake made it inevitable (in Mr Pollock’s submission) that the judge would err when he considered the second stage of the enquiry according to Dicey’s rule, ie, that the consequence of this lack of “capacity” was that the English law “swaps” contracts were void.

On the first of these points, Mr Pollock submits that the Kommunes are in an analogous position to an English corporation created by Royal Charter or an English common law corporation, such as Cambridge or Oxford university. He points out that it is well established in English case law that there is a clear distinction between the “capacity” and the “powers” of a corporation created by Royal Charter.

I accept that, for the purposes of English domestic law, the cases have long established that a corporation created by Royal Charter has the full “capacity” of a natural person to contract, even if there are limiting terms in the charter of incorporation. If there are limitations in the charter, the corporation has no “power” to carry out acts which are not authorised by its charter; and the doing of them may be restrained by injunction. Yet if acts are done which are beyond the “power” of the corporation, the acts are nonetheless valid; they are not, as between the corporation and a third party contracting with it, void for being beyond the “capacity” of the corporation. (Footnote: ³³) So the “power” of a corporation, in that context, is used to mean something less than the inherent ability of the corporation to exercise legal rights.

Mr Pollock particularly relies on the statements of Sir Stephen Brown P in Hazell v Hammersmith & Fulham Council, where he drew clear distinctions between “capacity” and “power” when considering the position of a municipal corporation that had been incorporated by Royal Charter pursuant to the Royal Prerogative and also in pursuance of the London Government Act 1963. Sir Stephen Brown said (at 1055H to 1056A):

“Arising from these two passages (Footnote: ³⁴) a further important point is to be noted. It is that care must be taken when using terms such as “capacity” and “powers” in this context. In the context now under consideration, the issue being addressed is the legal capacity [of the municipal corporation] as a legal entity, to do acts even though these may be unauthorised as outside conditions or directions contained in the charter. The corporation has no “power” lawfully to carry out such unauthorised acts, and the doing of them may be restrained by injunction: Jenkin v Pharmaceutical Society of Great Britain [1921] 1 Ch. 392. Today, in appropriate cases, relief would be available by way of judicial review. And steps can be taken to repeal the charter. But, if not restrained, such acts are nonetheless valid in law in the sense that they are not, as between the corporation and those contracting with it, void for being beyond the capacity of the corporation.”

Mr Pollock also emphasises the distinction drawn in the cases between want of capacity and abuse of powers in the context of a company incorporated under the English Companies Acts. He relies particularly on the statement of Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation: (Footnote: ³⁵)

“The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company.”

There is no dispute about those principles. The question is whether, as Mr Pollock submits, this same distinction between “capacity” and “power” must be maintained for the purposes of Dicey’s rule and the judge failed to adhere to it. He thereby reached the wrong conclusion on the “capacity” of the Kommunes.

It is clear from the full discussion on the evidence of the Norwegian law experts in Tomlinson J’s judgment at [107] – [127] that a Norwegian lawyer’s approach to the issue of “capacity” of a non-human legal entity to contract is different from that of English lawyers. The judge said that “…neither Norwegian public law nor private law overtly addresses the question: what is the capacity of the municipality to contract”. (Footnote: ³⁶) Further, he noted that Norwegian law “…is not interested in the question of whether a resolution of the Kommunes is valid or invalid, but rather [is interested] in the question whether the resolution can have an effect on third parties.” (Footnote: ³⁷) Therefore it was, in the judge’s view, “…not easy to transpose Norwegian legal theory into English terminology and in particular not into the language of capacity”. (Footnote: ³⁸)

So it seems to me that Mr Pollock’s argument that the judge impermissibly equated the Kommunes’ lack of “substantive power” with “capacity” for the purposes of Dicey’s rule requires a consideration of two matters. First of all, it requires an analysis of what is comprised by the word “capacity” for the purposes of the Dicey rule and so English conflict of laws rules. In short, does “capacity” as used in Dicey’s rule, have the narrow meaning for which Mr Pollock argues, or is it to be regarded more broadly, to take account of the fact that, in applying Dicey’s rule, one may well be dealing with non-English corporations whose constitutions are subject to other systems of law, whose legal concepts are not the same as those in English law? Secondly, it requires a consideration of the judge’s findings on the nature of the “power” of the Kommunes (or their lack of it) which result from his analysis of the Norwegian law evidence on this point. Thus one will be able to see whether the concept of the Kommunes’ “power” can come within whatever is the correct interpretation of “capacity” in the Dicey rule. That second exercise must also examine the judge’s approach to and findings on the “constitution” of the Kommunes. This analysis should also provide answers to the second and third criticisms that Mr Pollock makes of the judgment under this first issue.

The objective of conflict of laws rules is to enable a court to decide which system of law is to be applied to resolve a legal question when there is a foreign, ie. non-English, element, involved in an issue. In the present case the legal question is: by which system or systems of laws do you decide whether a contract, putatively governed by English law, between a Norwegian legal entity and an Irish one, is valid and binding on the Norwegian legal entity when it is alleged that the Norwegian legal entity did not have the “power” or the “capacity” to enter into the contract because of the terms of a Norwegian statute concerning the ability of Kommunes to conclude contracts of loan? I have deliberately used both “powers” and “capacity” in the last sentence. The issue to be resolved is, ultimately, whether the contract is valid or void in the circumstances described.

In framing the issue in this way, one is classifying, or characterising, the nature of the legal issue that has to be decided. Traditionally, that is the first stage in identifying the appropriate system of law which is to be applied to deal with the issue when non-English elements are involved, as here. The second stage is to select the rule of conflict of laws which lays down a “connecting factor” to the relevant foreign element for that issue. And the final stage is to identify the system of law which is tied by the connecting factor to that issue. (Footnote: ³⁹)

In Dicey’s rule, the legal issue for which one or more system of law has to be chosen by the English conflict rule is characterised as “the capacity of a corporation to enter into any legal transaction”. The unspoken proposition is that if, under the system (or systems) of law identified according to the rule, the corporation has the necessary “capacity”, then it will be able to enter into a valid legal transaction unless there is something that prevents it from doing so under the putative applicable law of the contract. Equally, if under the system (or systems) of law identified according to the rule the corporation does not have the necessary “capacity”, then it will not be able to enter into a valid legal transaction unless there is something that enables that result under the putative applicable law of the contract. That, inevitably, is stating the proposition in the way an English lawyer would analyse the matter. The rule as framed assumes that the legal concept of “capacity” has a commonly understood content and significance so far as concerns non-English corporations. But because this is a conflict of laws rule, the corporations to be considered may, by definition, be non-English, and matters concerning their constitution may be governed by laws other than English law. That is the case here. As Mance LJ points out in his judgment in the Raiffeisen case, (Footnote: ⁴⁰) classes or categories of issues which are recognised by English conflicts rules are man-made, not natural; they have no inherent value beyond their purpose of assisting in the selection of the most appropriate law to deal with them. They may need redefinition or modification. That must be so whether the conflicts rule is one agreed internationally, as with the Rome Convention, or is the product of the English common law.

In Macmillan Inc v Bishopsgate Investment Trust plc (No 3), (Footnote: ⁴¹) Auld LJ said that the underlying purpose of the classification of an issue and a rule of law (for the purposes of settling a conflict of laws rule) was:

“…to strive for comity between competing legal systems, [so 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…”. (Footnote: ⁴²)

I would say that the same must be true of the legal concepts that go to make up issues, in this case the concept of “capacity”. After all, there is no a priori reason why the Norwegian law’s concept of “capacity” (in relation to a non-human legal entity) should be the same as that of English law; nor is there any reason why the concept’s significance or consequences should be the same in any two systems of law. As already noted, it is obvious from Tomlinson J’s judgment that the Norwegian lawyers’ concept of a corporation’s “capacity” in the present context is very different from that of an English lawyer. Although Dicey’s rule is an English common law rule, to my mind it does not logically follow that the legal concepts used to make up the rule have to conform to English common law concepts. Indeed, I think we might be properly accused of legal parochialism if we were so to insist.

Sir Carleton Kemp Allen, in his inaugural lecture as Oxford Professor of Jurisprudence, described “capacity”, at least for English law purposes, as meaning:

“…the ability to exercise (which of course presupposes the ability to acquire) specific rights, not the mere ability, in general, to possess legal rights. By incapacity we mean the converse of this ability. It goes without saying that capacity or incapacity may be total or partial”. (Footnote: ⁴³)

The ability to exercise the legal right of concluding contracts is an obvious example of a capacity of a legal entity. On this analysis it may be total, or it may be partial in the sense that the ability may exist for some cases but not for others. But, if the ability does not exist in a particular case, then the consequence would be absolute, at least in English law.

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.

Yet, as I have already recorded, Mr Pollock emphasised in argument how English law has distinguished “capacity” from “powers” in relation to corporations, including those established under the Companies Acts. (Footnote: ⁴⁴) In relation to the latter it became axiomatic that the extent of the ability of such a legal entity to exercise specific legal rights must be within the purposes for which the entity was created, which will be defined in a company’s Memorandum of Association. (Footnote: ⁴⁵)

However, as Tomlinson J notes in his judgment, (Footnote: ⁴⁶) this approach to the concept of the “capacity” of a non-human entity such as a company is not universal. There is the Anglo-American tradition which maintains that a legal entity’s “capacity” or “power of law” is established with specific purposes in mind, so that actions beyond that purpose are not binding on the entity, because it cannot have any capacity outside its purpose. On the other hand there is what is described as a “continental” or “German” perception which considers the legal entity’s “power of law” to be universal, in which case there is no room for a doctrine of ultra vires. But, on the second approach, if there is to be some concept of a limitation on the ability of a non- human legal entity to conclude valid contracts, that has to be found in some other principle other than ultra vires.

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 (Footnote: ⁴⁷) that the concept of “capacity” has to be given a broader, “internationalist”, meaning and must not be confined to the narrow definition accorded by domestic English law. In my view it should be interpreted as the legal ability of a corporation to exercise specific rights, in particular, the legal ability to enter a valid contract with a third party. So I agree with the approach of the judge; for the purposes of English conflicts of laws, a lack of substantive power to conclude a contract of a particular type is equivalent to a lack of “capacity”, to use English terminology.

For similar reasons, it seems to me that the concept of a corporation’s “constitution” must be given a broad, “internationalist” interpretation. It is not a question of just trying to find some document, like a Royal Charter, or the Memorandum and Articles or some other written description of what the corporation is and can do. For the purposes of this English conflict of laws rule it is necessary to examine all the sources of the powers of the corporation under consideration. This will include any constitutional documents but also relevant statutes and other rules of law of the country where the corporation was created.

Mr Pollock accepts Tomlinson J’s finding of fact that the “swaps” contracts are loans within section 50 of the 1992 Act. Therefore, if my interpretation of “capacity” and “constitution” is correct, it must follow that WR can only succeed on this first issue if it can successfully attack the judge’s analysis and conclusion on what is the effect of the “constitution” of the Kommunes and of section 50; ie. the judge’s conclusion that their “constitution” restricts the Kommunes’ substantive power to conclude loan contracts. The consequence of that conclusion is that, in accordance with agreed principles of the “swaps” contracts’ applicable law, viz. English law, they are void. It is therefore necessary to analyse the judge’s findings on these points and to consider the second and third of Mr Pollock’s attacks on the judge’s decision on the “capacity” issue, as identified above.

The Kommunes are at the bottom of a three tier system of government in Norway. There are 430 Kommunes. They are grouped into 19 county authorities. The central government is the top tier. The Kommunes have directly elected assemblies and their own Mayors and administrative officers.

Professor Dr Graver, who was the Norwegian law expert for the Kommunes before Tomlinson J, stated in his report that local government has its legal basis in statute, not the Constitution of the Kingdom of Norway. That means, he said, that the Norwegian Parliament (Stortinget) “is free to determine the contents and scope of the responsibilities, powers and duties of the municipalities in Norway”. (Footnote: ⁴⁸) However, legislation has consistently established the municipalities as separate legal entities with autonomy in relation to the central government. The Alderman Act of 1837 first defined municipalities’ rights and responsibilities. Those are now defined by the 1992 Act and also by other legislation in other fields that impose obligations and confer powers on the municipalities. (Footnote: ⁴⁹)

Part 1 of the 1992 Act describes the function and purpose of the municipalities in Norway. Professor Dr Graver said that, as stated in section 1 of the 1992 Act, the purpose of the municipalities is “the efficient and effective management of the common local government interests”. Professor Dr Graver stated that, according to established legal opinion, section 1 did not in any way limit the legal powers or freedom of action of the municipalities. He said, (Footnote: ⁵⁰) “municipalities are free to act in any way, hereunder enter into contracts, unless otherwise regulated for by statute”.

Professor Dr Graver has a section in his first report entitled “The nature of legal power under Norwegian law”. (Footnote: ⁵¹) The judge does not specifically adopt in his judgment what Professor Graver states there, but the propositions seem to me to form the basis of the judge’s conclusion that the lack of a “power conferring rule” or the existence of a “power limiting rule” as understood in Norwegian law, is the equivalent of a lack of “capacity” for the purposes of the Dicey rule. Professor Dr Graver says, first, that under Norwegian administrative law, all administrative acts that are not physical acts must be based upon a “kompetanse”, which he calls a “legal power” or “power”, and which he defines as the “power to enact legally binding rules or decisions”. Secondly, he says that the existence and extent of that power is a matter of law. Professor Dr Graver and Professor Woxholth (who gave expert evidence for Depfa) agree that the exercise of passing resolutions to enter contracts is an exercise of power by the Kommunes. All experts had agreed that section 50(1) of the 1992 Act is a “rule regarding the powers of the municipalities that restricts the municipalities’ powers to raise loans”, although Professor Bräthen expressed a qualification. (Footnote: ⁵²)

The judge accepted the evidence of Professor Dr Graver that the Kommunes enjoyed several sources of power. With regard to what Professor Dr Graver called their “public authority”, the Kommunes’ source of power was always legislation passed by the Norwegian Parliament, or Stortinget. (Footnote: ⁵³) However, there are several sources of power of the Kommunes on all other matters, unlike modern English local authorities, which depend wholly on statute for their powers.

With regard to the Kommunes’ legal powers in relation to property, the freedom to contract and institutional autonomy, Tomlinson J found, on the Norwegian law evidence, as follows: (1) the Kommunes have the same basic powers as private persons. (Footnote: ⁵⁴) (2) The Kommunes have the legal power to contract in respect of anything which is not specifically limited by legislation or Acts of Government based on legislation. (Footnote: ⁵⁵) (3) When it comes to borrowing, the Local Government Act limits the powers and freedoms of the municipalities. (Footnote: ⁵⁶) (4) Section 50 of the 1992 Act provides the municipalities with the power to take up loans, but it also restricts and regulates the purposes for which they may do so. (Footnote: ⁵⁷) (5) A resolution of a Kommune to enter into a loan agreement of a type that is prohibited by section 50 of the 1992 Act is “assailable”, ie. may be determined by a court to have been invalid. (Footnote: ⁵⁸) (6) If such a resolution is declared invalid, that invalidity can be from the date of the declaration (“ex nunc”) or from the date of the resolution itself (“ex tunc”). (Footnote: ⁵⁹) (7) The Norwegian law experts agreed that even if the resolution passed by a Kommune to enable it to conclude a loan agreement is invalid, it is not an automatic consequence that the ensuing loan agreement is itself invalid. It will not be invalid if the counterparty was acting in good faith. (Footnote: ⁶⁰) (8) The operation of the “good faith” principle, so that a contract which was concluded following upon a resolution that was passed in excess of the Kommune’s powers, would mean that the Kommune would be held to its bargain. However, the judge said that this legal consequence was to be regarded as an “…incident of the Norwegian private law of contract, having no significance in the proper characterisation of the Norwegian rule of public law to the effect that the municipalities lacked the substantive power to conclude the “swaps” agreements”. (Footnote: ⁶¹)

The judge concluded his findings and analysis as follows:

“123.

I have dealt with this point at some length because of its obvious importance and out of deference to Mr Mitchell's interesting argument. I have been particularly concerned to examine carefully a point on which Mr Milligan and Mr Railton made common cause. There is no doubt that Norwegian law looks at these matters in a way different from the English approach. At the end of the day however the conclusion cannot I think be escaped that a lack of substantive power to enter into an agreement can only properly be characterised as going to capacity. If these were loans, the municipalities had no power to enter into them. If the municipalities had no power to enter into the agreements, then in English legal terminology they lacked capacity so to do. The fact that an agreement entered into by a municipality without the power so to do may nonetheless be regarded as binding on it as against a third party does not detract from this conclusion. That is an incident of private law, whose function it is to tell one whether a contract entered into without capacity may nonetheless be binding.”

Mr Pollock submitted that a close analysis of the written and oral evidence of the Norwegian law experts, particularly that of Professor Dr Graver, shows that their view was that section 50 of the 1992 Act did not cut down the “original” full capacity of the Kommunes to enter into valid “swaps” contracts. I have read again all the passages in the oral evidence of the experts to which Mr Pollock and Mr Milligan referred us. I have also examined the passages from the reports of the experts the parties had invited us to read.

Having done this exercise, I am absolutely satisfied first, that the conclusions of the judge on Norwegian law that I have summarised above are conclusions that he was entitled to come to on the evidence. Secondly, although the judge does not explicitly state what he regards as the “constitution” of the Kommunes, it is clear from the judgment that he regards their “constitution” as comprising all that bundle of powers, duties and abilities to exercise legal rights that can be attributed to the Kommunes, which are to be derived from Norwegian customary law and statute; all of which, in Norwegian law terms, is part of public or administrative law. Thirdly, the judge, correctly in my view, considered all those aspects when analysing what were the “powers” of the Kommunes to conclude the “swaps” contracts. Fourthly, on all the expert evidence, the judge was bound to come to the conclusion he did that the effect of the 1992 Act, in particular section 50, is both to grant power to the Kommunes to conclude certain types of loan contract and also to restrict their power to conclude certain types of loan contract. Fifthly, the judge was well aware of the distinction between the Kommunes having the power to enter into the “swaps” contracts but being prohibited from doing so by a Norwegian statute, as opposed to the Kommunes not having the power to do so at all. In my view he correctly concluded that the effect of the 1992 Act and section 50 in particular was the latter, not the former.

Therefore, in my view, Tomlinson J did analyse the “constitution” of the Kommunes, in the sense that I interpret that word in Dicey’s rule. He came to the correct conclusion that, under their constitution, the Kommunes lacked the substantive power to make valid resolutions in respect of the “swaps” contracts. He was therefore right to conclude that “in English legal terminology” the Kommunes lacked the “capacity” to enter into those contracts in the sense that I have discussed above.

The fact that the judge also found, (as summarised at (7) of paragraph 55 above) that, in Norwegian law, even an invalid resolution may result in a contract that binds the Kommune and third parties, is irrelevant for the purposes of the Dicey rule, as Tomlinson J correctly stated in paragraphs 125 – 127 of the judgment. Once the issue of “capacity” has been decided according to the constitution of the corporation, then the consequence of the lack of “capacity” is something that is to be determined by the putative applicable law of the contract, that is English private law. The law of the place of the corporation is not involved at this stage, as (at least implicitly) the rule in Dicey makes plain and as Mr Pollock accepts, at least as I understood his argument. Indeed, if the private contract law of the place of the corporation were to be involved at this stage, then there would be no scope for the involvement of the putative applicable law of the contract. There is no dispute that, under English law, if a corporation lacks “capacity” then it cannot conclude a valid English law contract. This seems to be a result that is both logical and reasonable.

It must follow, as Mr Pollock accepts, that once the judge ruled there was a lack of “capacity” then he was correct to conclude that the “swaps” contracts were invalid and void. Therefore I would dismiss WR’s appeal on the “validity issue”. In the light of this conclusion, it is unnecessary for me to consider the arguments on “authority” and I will not do so.

It is common ground that if the “swaps” contracts are void, then the only remedy available to Depfa to recover the money advanced to the Kommunes is one in restitution. The basis must be that the Kommunes became “unjustly enriched” by being paid the money under void contracts. There was little analysis of the precise basis on which the restitutionary claim is put, but I think it was common ground that it is a common law claim for money had and received, in circumstances where there had been a total failure of consideration. That was certainly the basis on which banks sought the return of money advanced to local authorities in the English local authorities “swaps” litigation. (Footnote: ⁶²) In those cases there was some debate on whether the basis of recovery was different in an “open” swaps contract, ie. one that was still being worked out and a “closed” swaps contract where all the transactions were supposedly fulfilled. In the latter case it was argued that the correct analysis was that there had been an “absence of consideration” in the first place. However, this distinction is a question of which is the more apt terminology; it does not have any legal significance. (Footnote: ⁶³)

Nevertheless, there remains a threshold question in relation to Depfa’s restitutionary claim to be repaid the money advanced to the Kommunes under the “swaps” contracts. It is whether or not there is still a principle or policy of English law, as stated by the House of Lords in Sinclair v Brougham, (Footnote: ⁶⁴) that a person (A) who has paid away money to another (B) under a contract of loan which is held to be void for lack of capacity of (B) to conclude that contract is unable to recover that money in a restitutionary claim at law. (Footnote: ⁶⁵) I think that there were two bases for that rule. First, the ultra vires doctrine is there to protect the public. (Footnote: ⁶⁶) Secondly, if a claim to recover the money could be made in restitution, it would circumvent the rule that contracts made ultra vires are void. Therefore, as a matter of public policy, there can be no claim for restitution at law.

There is no doubt that, by a majority, the House of Lords decided in WLG, departing from Sinclair v Brougham, that a claim to recover money paid under an ultra vires borrowing contract could not normally be made in equity. The question remains whether their Lordships in WLG departed from the House’s previous decision in Sinclair v Brougham (Footnote: ⁶⁷) that such a claim cannot be maintained in an action at law for money had and received for a consideration that has totally failed. That depends upon a close analysis of their Lordships’ speeches in WLG.

I should start with Sinclair v Brougham. The facts are simple. The Birkbeck Permanent Benefit Building Society, an unincorporated body, decided to set up a banking business, called the Birkbeck Bank, although it was not a separate legal entity. The banking business took deposits. It was held that the banking business was ultra vires the objects of the building society. The building society became insolvent and there was much litigation on how its remaining assets, which included deposits by customers, were to be distributed. The issue of whether the depositors were entitled to recover their deposits arose in the context of an application to the court by the liquidator on how he was to distribute the Building Society’s assets in its winding up.

Because the banking business was held to be ultra vires the objects of the building society, the contracts between the depositors and the building society were void. The depositors therefore could not recover their deposits in an action in contract. Instead they attempted recovery on the basis of a common law claim that the building society held their deposits as “money had and received” to the use of the depositors. The House of Lords rejected this claim. Viscount Haldane LC said that a claim “quasi ex contractu” was effectively a claim based on a fictitious promise. Such a claim in this case would strike at the root of the doctrine of ultra vires, because no form of promise can be imputed when one of the parties to it does not have the capacity to conclude it. (Footnote: ⁶⁸) Lord Dunedin said that the common law “works by way of a fiction which becomes inapplicable when the money has been received under an ultra vires contract”. (Footnote: ⁶⁹) Lord Parker of Waddington said that a claim for money “had and received” could not succeed because “…the implied promise on which the action for money had and received is based would be precisely that promise which the company or association could not lawfully make”. (Footnote: ⁷⁰) Lord Sumner said that a common law action for the money deposited would “…be indirectly to sanction an ultra vires borrowing”. But, because the cause of action rested upon a notional or imputed promise to repay, “…the law cannot de jure impute promises to repay, whether for money had and received or otherwise, which, if made de facto, it would inexorably avoid”. (Footnote: ⁷¹)

I have already set out the background to WLG and noted that the sole issue with which the House of Lords was concerned was whether the bank could claim compound interest on money recovered from the council. The decision in Sinclair’s case was examined in detail by some members of the Appellate Committee. Lord Goff of Chieveley summarised the reason for the rejection of the depositors’ claim by the House of Lords in Sinclair’s case as being that “…to allow such a claim would permit an indirect enforcement of the contract which the policy of the law had decreed should be void”. (Footnote: ⁷²) Lord Goff noted that the reasoning of the House of Lords was based on “the language of implied contract”. (Footnote: ⁷³) However, the House of Lords in Sinclair’s case resorted to equity to provide a remedy for the hapless depositors. Lord Goff’s view in WLG was that the House was attempting to provide a solution to a particular practical problem, rather than laying down any general principle. Thus Lord Goff said that (leaving Lord Parker of Waddington’s speech on this point to one side as being difficult to reconcile with the facts) he “…did not discern in the speeches of the Appellate Committee [in Sinclair’s case] any intention to impose a trust carrying with it the personal duties of a trustee”. (Footnote: ⁷⁴)

Lord Goff then stated his view on how Sinclair v Brougham should be dealt with in the context of the case then before them, which was that of an interest rates swap agreement and so was not, therefore, a borrowing contract pure and simple. Lord Goff emphasised this distinction. He also said that because Sinclair’s case did not intend to create any principle of general application it had no relevance to the present case. Lord Goff then said why, in his opinion, it would not be right for the House of Lords in WLG to depart from Sinclair v Brougham. I think it is best if I quote the whole relevant passage of Lord Goff’s speech: (Footnote: ⁷⁵)

“For present purposes. I approach this case in the following way. First, it is clear that the problem which arose in Sinclair v. Brougham, viz. that a personal remedy in restitution was excluded on grounds of public policy, does not arise in the present case, which is not of course concerned with a borrowing contract. Second, I regard the decision in Sinclair v. Brougham as being a response to that problem in the case of ultra vires borrowing contracts, and as not intended to create a principle of general application. From this it follows, in my opinion, that Sinclair v. Brougham is not relevant to the decision in the present case. In particular it cannot be relied upon as a precedent that a trust arises on the facts of the present case, justifying on that basis an award of compound interest against the council.

But I wish to add this. I do not in any event think that it would be right for your Lordships' House to exercise its power under the Practice Statement (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) to depart from Sinclair v. Brougham. I say this first because, in my opinion, any decision to do so would not be material to the disposal of the present appeal, and would therefore be obiter. But there is a second reason of substance why, in my opinion, that course should not be taken. I recognise that nowadays cases of incapacity are relatively rare, though the swaps litigation shows that they can still occur. Even so, the question could still arise whether, in the case of a borrowing contract rendered void because it was ultra vires the borrower, it would be contrary to public policy to allow a personal claim in restitution. Such a question has arisen in the past not only in relation to associations such as the Birkbeck Permanent Benefit Building Society, but also in relation to infants' contracts. Moreover there is a respectable body of opinion that, if such a case arose today, it should still be held that public policy would preclude a personal claim in restitution, though not of course by reference to an implied contract. That was the opinion expressed by Leggatt L.J. in the Court of Appeal in the present case (see [1994] 1 W.L.R. 938, 952E-F), as it had been by Hobhouse J.; and the same view has been expressed by Professor Birks (see An Introduction to the Law of Restitution (1985), at p. 374). I myself incline to the opinion that a personal claim in restitution would not indirectly enforce the ultra vires contract, for such an action would be unaffected by any of the contractual terms governing the borrowing, and moreover would be subject (where appropriate) to any available restitutionary defences. If my present opinion were to prove to be correct then Sinclair v. Brougham will fade into history. If not, then recourse can at least be had to Sinclair v. Brougham as authority for the proposition that, in such circumstances, the lender should not be without a remedy. Indeed, I cannot think that English law, or equity, is so impoverished as to be incapable of providing relief in such circumstances. Lord Wright, who wrote in strong terms (“Sinclair v. Brougham” (1938) 6 C.L.J. 305) endorsing the just result in Sinclair v. Brougham, would turn in his grave at any such suggestion. Of course, it may be necessary to reinterpret the decision in that case to provide a more satisfactory basis for it: indeed one possible suggestion has been proposed by Professor Birks (see his An Introduction to the Law of Restitution, pp. 396 et seq.). But for the present the case should in my opinion stand, though confined in the manner I have indicated, as an assertion that those who are caught in the trap of advancing money under ultra vires borrowing contracts will not be denied appropriate relief.”

Lord Goff went on to hold that there was no basis for imposing any trust in the WLG case. But he concluded nevertheless that the court had jurisdiction to award compound interest when ordering the recovery of money by (A) which it had paid to (B) under a void (non-borrowing) contract and the recovery was on the basis of a personal, as opposed to a proprietary, claim in restitution. (Footnote: ⁷⁶)

Lord Goff obviously accepted as incorrect the theory that a restitutionary claim, at law, for money advanced under a borrowing contract which was void because ultra vires the borrower, was based on an “implied contract”. (Footnote: ⁷⁷) But, equally clearly, Lord Goff regarded the issue of whether there could be such a restitutionary claim at law in such circumstances as an open question. He was in favour of recognising such a right.

Lord Woolf, who gave a separate opinion, agreed with Lord Goff on the two major points, viz. that the bank did not have an equitable proprietary claim in respect of the money paid to the authority, but, nonetheless, compound interest could be awarded by a court where one party was under a duty to make restitution to another. (Footnote: ⁷⁸) Lord Woolf did not analyse in detail the decision in Sinclair’s case, nor did he say whether he agreed or disagreed with the views of Lord Goff on that case which I have quoted above. On the other hand, Lord Woolf certainly did not say that he believed that Sinclair v Brougham should be departed from, either in whole or in part. I therefore agree with the position, adopted by all parties before us, that Lord Woolf joined Lord Goff in the view that Sinclair’s case was not to be departed from on the issue which concerns us now.

Lord Browne –Wilkinson gave the leading majority speech in WLG. At the outset of his analysis of Sinclair v Brougham, he noted that the bank relied on the case for the proposition that a resulting trust arose when a payment had been made under a void contract. (Footnote: ⁷⁹) Lord Browne-Wilkinson dealt first with the decision in Sinclair v Brougham on the claim advanced by the depositors in “quasi-contract”, on the footing that their money was “had and received” by the building society. He observed that the House of Lords in Sinclair’s case regarded the claim in “quasi-contract” as being based on an implied contract and that to imply a contract to repay would be to imply a contract to exactly the same effect as the express ultra vires contract of loan and that any such implied contract must, itself, be void as being ultra vires.

Lord Browne-Wilkinson then continued:

“Subsequent developments in the law of restitution demonstrate that this reasoning is no longer sound. The common law restitutionary claim is based not on implied contract but on unjust enrichment: in the circumstances the law imposes an obligation to repay rather than implying an entirely fictitious agreement to repay: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] 63-64, per Lord Wright; Peavey & Matthews Pty Ltd v Paul [1987] 162 CLR 221, 227, 225; Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 578C: Woolwich Equitable Building Society v IRC [1993] AC 70. In my judgment, Your Lordships should now unequivocally and finally reject the concept that the claim for monies had and received is based on an implied contract. I would overrule Sinclair v. Brougham on this point.

It follows that in Sinclair v. Brougham the depositors should have had a personal claim to recover the moneys at law based on a total failure of consideration. The failure of consideration was not partial: the depositors had paid over their money in consideration of a promise to repay. That promise was ultra vires and void: therefore the consideration for the payment of the money wholly failed. So in the present swaps case (though the point is not one under appeal) I think the Court of Appeal were right to hold that the swap moneys were paid on a consideration that wholly failed. The essence of the swap agreement is that, over the whole term of the agreement, each party thinks he will come out best: the consideration for one party making a payment is an obligation on the other party to make counter-payments over the whole term of the agreement.”

I would respectfully make two comments on that passage. In the first paragraph Lord Browne-Wilkinson was being specific in identifying the precise point on which he would “overrule” Sinclair v Brougham. It is the concept that the common law claim for money had and received, as advanced in that case, is based on an implied contract. But, secondly, Lord Browne-Wilkinson says, in the next paragraph, that it follows from this conclusion that the depositors in Sinclair’s case “should have had a personal claim to recover the moneys at law based on a total failure of consideration”. In other words, he appears to be rejecting the possible opinion expressed in the passage in Lord Goff’s speech, at page 688-9, that I have quoted above, viz. that the recovery at law of money paid out in a borrowing contract rendered void because it was ultra vires the borrower, should not be recoverable as a matter of public policy. If so, Lord Browne-Wilkinson must, by implication at least, be departing from Sinclair v Brougham on this point as well.

Lord Browne-Wilkinson then went on to analyse how the House of Lords had dealt with the equitable claim of the depositors in Sinclair v Brougham. He concluded (Footnote: ⁸⁰) that “…the decision in rights in rem in Sinclair v Brougham should also be overruled…”. He then summarised the position:

“If Sinclair v Brougham, in both its aspects, is overruled, the law can be established in accordance with principle and commercial common sense: a claimant of restitution of moneys paid under an ultra vires and therefore void, contract has a personal action at law to recover the moneys paid as on a total failure of consideration; he will not have an equitable proprietary claim which gives him either rights against third parties or priority in an insolvency; nor will he have a personal claim in equity, since the recipient is not a trustee.”

Once again, Lord Browne-Wilkinson does not specifically state that he is either dealing with or excluding from his remarks the specific case of borrowing contracts rendered void because ultra vires the borrower. Nor does he comment on the remarks of Lord Goff. The passage is quite general. But looked at overall, it seems to me that Lord Browne-Wilkinson’s speech overruled, at least implicitly, the House of Lord’s decision in Sinclair v Brougham that a lender cannot recover money lent under a borrowing contract which has been rendered void because it is ultra vires the borrower.

Lord Slynn of Hadley stated at the start of his speech: (Footnote: ⁸¹)

“My Lords, for the reasons given by my noble and learned friend Lord Browne-Wilkinson I agree that Sinclair v. Brougham [1914] A.C. 398 should be departed from and that it should be held that in this case the local authority was neither a trustee of, nor in a fiduciary position in relation to, the moneys which it had received from the bank, nor had it improperly profited from the use of those moneys. For the reasons which he gives no resulting trust could arise on the present facts.”

The statement of Lord Slynn is not qualified in any way. If I have correctly analysed the effect of Lord Browne-Wilkinson’s speech, then, in my view, that wording of Lord Slynn’s speech demonstrates that he intended to follow Lord Browne-Wilkinson in relation to Sinclair v Brougham. In short, he agreed that it should be departed from on the right of a borrower to make a restitutionary claim, at law, for money lent under a borrowing contract which is rendered void because ultra vires the borrower.

Lord Lloyd of Berwick made the following statement about the decision in Sinclair v Brougham: (Footnote: ⁸²)

“Both parties, therefore, came before your Lordships on the basis that Sinclair v. Brougham was correctly decided, for whatever it did decide. But in the course of the argument your Lordships indicated that the House would be willing to reconsider the correctness of that decision. For the reasons given by my noble and learned friend, Lord Browne-Wilkinson, I agree that Sinclair v. Brougham was wrongly decided on both the points discussed in his speech, and should be overruled. I understand that all your Lordships are agreed that the bank has failed to make good its claim that it has an equitable cause of action against the local authority for breach of duty as trustee or fiduciary. It follows that the ground on which the courts below awarded compound interest cannot be supported. The local authority has succeeded on the only issue on which the parties came before your Lordships. Accordingly, I would be content to allow the appeal, and leave it at that.”

Although Lord Lloyd talks of “both the points” mentioned in Lord Brown-Wilkinson’s speech, I would respectfully suggest that an analysis of his speech shows that Lord Browne-Wilkinson decided that Sinclair v Brougham should be overruled on more than two points. First, there was the “implied contract” theory as the basis for a restitutionary claim to recover money that had been paid under a void contract. Secondly, there was the right to make a restitutionary claim at all for such money at law. Thirdly, there was the right to make such a claim in equity on the basis of a resulting trust. But I think, nonetheless, that it is implicit that Lord Lloyd agreed that Sinclair v Brougham should be overruled in whatever respects Lord Browne-Wilkinson had decided it should be. Therefore Lord Lloyd was agreeing that Sinclair v Brougham should be overruled on the principle that money advanced under a borrowing contract which is rendered void because ultra vires the borrower, cannot be recovered in a claim at law, as money had and received, as a matter of public policy.

The House of Lords delivered its opinions in WLG on 22 May 1996. The next day the Judicial Committee of the Privy Council handed down its advice in Goss v Chilcott. (Footnote: ⁸³) A finance company had lent money to Mr and Mrs Goss, on the security of a mortgage over their property. The Gosses had agreed with Mrs Goss’ brother, Mr Haddon, that they would pass on the money to him, on condition that he would repay it to the company in accordance with the terms of the mortgage instrument between the company and the Gosses. The money was paid directly to Mr Haddon, who did not repay it to the company. But he did purport to alter the terms of the mortgage instrument, without the knowledge of Mr and Mrs Goss, by extending the time for repayment of the loan. That alteration was held to have been done by Mr Haddon as agent for the finance company of which he was a director.

The finance company went into liquidation and the liquidator sought to recover the outstanding principal sum from Mr and Mrs Goss. The Privy Council held, on authority going back to Pigot’s case, (Footnote: ⁸⁴) that the unauthorised but material alteration of the mortgage instrument, made on behalf of the lender, (ie. the company) rendered it unenforceable. However, the Privy Council also held that because the Gosses had totally failed to perform their personal obligation under the mortgage instrument of repaying the capital sum advanced, there had been a total failure of consideration for the money advanced. Accordingly, the liquidator, on behalf of the finance company, could recover the principal sum in restitution. Moreover, the Gosses could not rely on any defence of “change of position” as a result of handing the money over to Mr Haddon.

I will have to consider the case again in relation to “change of position” under Issue Three. For present purposes the case is important for two reasons. First, it is clear that this was a claim to recover on a “borrowing contract”. It must be accepted, of course, that the reason that the contract was unenforceable was not that it was ultra vires the borrower; it was because of an unauthorised alteration of the contract terms on behalf of the lender. But it was not argued that the finance company was precluded, on policy grounds, from making a restitutionary claim for the principal sum lent as money “had and received”, even though the borrowing contract was unenforceable. Moreover, Lord Goff, who gave the advice of the Privy Council, did not mention the controversy surrounding Sinclair v Brougham that had occupied him and others of their Lordships so much in WLG. (Footnote: ⁸⁵)

We were told that there have been no subsequent cases in which that part of the decision of the House of Lords in WLG with which we are concerned has been analysed. There was some discussion of the ambit of the House of Lord’s decision in WLG by the Court of Appeal in Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council. (Footnote: ⁸⁶) The main issues there were, first, whether there was a distinction between “open” swaps contracts and “closed” ie. completed ones and, secondly, whether there is a relevant distinction between the concepts of a “failure of consideration” and an “absence of consideration” and whether this made any difference to the right to recover in restitution. Morritt LJ noted that the doctrine of ultra vires existed for the protection of the public. (Footnote: ⁸⁷) But he also stated (Footnote: ⁸⁸) that, subject to the defence of “change of position”, a recipient of money under an ultra vires contract has no right to it and if he keeps it he will be “…enriched”. Further, if the recipient does not then or subsequently obtain a right to keep the money “…such enrichment will be unjust”. Morritt LJ also stated the general proposition that payments made in purported performance of a contract which is ultra vires are “..necessarily made for a consideration which has totally failed and are therefore recoverable as money had and received”. (Footnote: ⁸⁹) Morritt LJ does not draw a distinction between borrowing contracts that are ultra vires and other types of contract. Therefore he appears to accept that recovery of money under all forms of ultra vires contracts is possible, notwithstanding the public policy behind the doctrine of ultra vires.

Waller LJ did not add anything on this aspect. Robert Walker LJ noted that, in WLG, Lords Browne -Wilkinson, Slynn, Woolf and Lloyd all thought that Sinclair v Brougham should be departed from on the issue of the right to make an equitable proprietary claim. (Footnote: ⁹⁰) But he does not comment on the issue with which we are concerned. He expresses the view that there is no real distinction between a restitutionary claim based on a “total failure” of consideration and one based on an “absence of consideration”. He said: “The choice between the two expressions may be no more than a matter of which is the apter terminology”. (Footnote: ⁹¹) I would respectfully agree.

We were referred to several text books on this point. The latest edition of Goff & Jones: The Law of Restitution states, when discussing public policy restrictions on personal (as opposed to proprietary) restitutionary claims, that the “…much criticised decision [of Sinclair v Brougham] has now been overruled”. (Footnote: ⁹²) The late Professor Peter Birks stated in his book Unjust Enrichment (Footnote: ⁹³) that the House of Lords in WLG overruled “both limbs” of Sinclair v Brougham. I take that to mean the decisions that there could not be a claim for money had and received in the case of an ultra vires borrowing contract and that there could be a claim in equity. Professor Burrows states in The Law of Restitution (Footnote: ⁹⁴) that the majority in WLG (viz. Lords Browne-Wilkinson, Slynn and Lloyd) held that Sinclair v Brougham had been wrongly decided in rejecting the depositors’ action for money had and received. Lastly, I have also looked at Professor Virgo’s book The Principles of the Law of Restitution, (Footnote: ⁹⁵) in which he states (citing Lord Goff’s speech in WLG), that “it now appears that” that “…even where the transaction involves a loan…” there can be restitution of money lent because it is now recognised that the obligation to make restitution is imposed by law and is independent of the contractual obligation to repay the loan.

My conclusion is that the majority of the House of Lords in WLG did depart from the decision in Sinclair v Brougham that a lender under a borrowing contact that is void because ultra vires the borrower, cannot recover the sum lent in a restitutionary claim at law. As a result of the decision of the majority of the House of Lords in WLG such a claim can be advanced. It is, of course, not a claim based on any implied contract or promise and it does not indirectly enforce an ultra vires contract, for the reasons given by Lord Goff at page 688G-H of WLG. Moreover, I respectfully agree with him that any such restitutionary claim must be subject, where appropriate, to any available restitutionary defences, including any that can legitimately be based on public policy. If I am correct then Sinclair v Brougham can “fade into history” as Lord Goff hoped it would.

It follows that Depfa is not prevented by authority from advancing its claim for restitutionary recovery of the sums advanced to the Kommunes. But, in Mr Milligan’s submission, the right to make such a claim is defeated, at least in part, either by a public policy argument or by the defence of “change of position”. Those are the subject of Issue Three.

Under this issue, I understand Mr Milligan to accept that Depfa is entitled to some measure of restitution for the money it has advanced to the Kommunes. However, he submits that Depfa is only entitled to recover in restitution so far as that is consistent with the policy inherent in section 50 of the 1992 Act. He emphasises that the judge found, at [139] of his judgment, 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”. Mr Milligan submits that the judge should have given full force to the policy of section 50 and the 1992 Act. This would be done by holding that the English law of restitution would, as a matter of policy or comity, acknowledge the public policy of the Norwegian statute and give it effect in relation to the restitutionary claim which arises as a result of the finding that the “swaps” contracts are invalid because the Kommunes lacked the substantive power to conclude them. Therefore, Mr Milligan argues, because the right to restitution only arises where there has been unjust enrichment, the citizens of the Kommunes (through the Kommunes as legal entities) should not be liable to repay to Depfa any balance after the Kommunes have repaid to Depfa all the sums recovered upon the liquidation of the Kommunes’ investments of the sums advanced by Depfa to them. In other words, Depfa’s right to restitution should, as a matter of public policy, be limited to the “value surviving” of the amount of money advanced by Depfa under the “swaps” contracts. Mr Milligan therefore submits that the judge was wrong to conclude at [166] that “public policy does not defeat the personal claim in restitution for such an action is unaffected by the contractual terms governing the borrowing and is subject, where appropriate, to any restitutionary defences”.

Mr Milligan described this argument as giving effect to the defence of “change of position” to a restitutionary claim, based upon public policy or based upon the policy of the Norwegian 1992 Act. With respect, I think this is the wrong analysis. In my view the English cases show that these are two distinct defences to a restitutionary claim. Thus, in Kleinwort Benson Ltd v Lincoln City Council, (Footnote: ⁹⁶) Lord Goff of Chieveley referred to “appropriate defences...together with the defence of change of position” and also to “…particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery [in restitution] should not be allowed…”. The first defence (that is relevant here) is that recovery should not be permitted, either in whole or part, on public policy grounds. The second defence is that recovery should not be permitted, in whole or in part, because the defendant to the claim has suffered a “change of position”. The legal basis for each is different and I think that the two need to be kept apart.

Mr Milligan submits that Tomlinson J erred in four respects in rejecting the “public policy” argument. First, he submits that the judge misunderstood what Lord Goff had said in WLG at page 688. (Footnote: ⁹⁷) Secondly, he submits that the judge’s conclusion was wrong in principle. Thirdly, he submits it is contrary to authority. Lastly, he submits that such a result produces injustice.

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. Mr Milligan referred us to a number of examples. An important decision in this line is Boissevain v Weil. (Footnote: ⁹⁸) It held that a sum of foreign currency which had been borrowed by a British subject in the Netherlands during the Second World War, on condition that it should be repaid in sterling after the war as soon as the law permitted, could not be recovered either in contract or in restitution, because the Defence Regulations forbade the very act of borrowing. The court could not, via a restitutionary claim, indirectly enforce what the regulations had forbidden.

This principle has been confirmed in the recent decisions of the House of Lords in Dimond v Lovell (Footnote: ⁹⁹) and Wilson v First County Trust Ltd (No 2). (Footnote: ¹⁰⁰) Thus where a consumer credit agreement has been improperly executed in contravention of the consumer credit regulations and the statute or regulations provide that the debtor does not have to repay in consequence because the debt is unenforceable, the creditor cannot recover the money in restitution. To permit such a claim would be inconsistent with the intent of Parliament, which sets the public policy in the statutory provisions. As both Lord Nicholls and Lord Hope emphasised in the First County Trust case, the question is: what did the statute intend? If it is clear that the statute intended that the creditor should not recover money advanced, then the court cannot attempt to override or outflank the statutory provision by substituting a common law remedy such as restitution. The application of that rule, which is undoubtedly a public policy rule, must depend on the construction of the relevant statutory provisions. Thus, in Wilson v First County Trust Ltd (No 2), Lord Hope said that it would be “.. inconsistent with the statute to provide [First County Trust] with a common law remedy [of restitution] to redress the enrichment which Mrs Wilson [the borrower] received at [First County’s] expense”. (Footnote: ¹⁰¹)

Mr Milligan also relied on the statement of Lord Goff in WLG, at page 688, that if a case of a borrowing contract that was void because ultra vires arose today there was still a respectable body of opinion that “...it should still be held that public policy would preclude a personal claim in restitution, though not of course by reference to an implied contract”. Lord Goff’s remarks which immediately follow that statement, as quoted at paragraph [68] above, clearly demonstrate that he did not regard himself as part of that body of opinion. If my analysis of the decision of the House of Lords in WLG is correct, the majority did depart from the decision in Sinclair v Brougham on the question of whether a claim in restitution could be made, at law, for the return of money under a void borrowing contract. Therefore, even if there may still be a body of opinion as Lord Goff suggests, it would seem that the Supreme Court would now see no reason, on general public policy grounds, to prevent a restitutionary claim for the return of money advanced under a borrowing contract.

Mr Milligan also referred us to text books in support of his argument that it would be consistent with public policy to restrict the right to restitution in the case of a void borrowing contract to the “surviving value”. This argument was advanced by the late Professor Birks in An Introduction to the Law of Restitution, published in 1985, ie. long before the House of Lords’ decision in WLG. His proposition was apparently advanced as a means of circumventing what Professor Birks saw as a wrong decision of the House of Lords in Sinclair v Brougham on the personal claim for restitution by the depositors in that case. (Footnote: ¹⁰²) In Unjust Enrichment, (Footnote: ¹⁰³) Professor Birks argued that the majority decision in WLG to depart from Sinclair v Brougham endorsed the view that the public policy argument against allowing a restitutionary claim to recover money advanced on a void borrowing contract is met by confining the claim to just the “enrichment” which survives. It is fair to note that he regarded this as part of the “change of position” defence. But the proposition is not supported by any particular case law. In The Principles of the Law of Restitution, (Footnote: ¹⁰⁴) Professor Virgo comments that a restitutionary claim in the case of a void contract “…should lie only when it is an appropriate way of fulfilling the policy which made the contract void in the first place. It may be particularly difficult to determine when such a restitutionary response is appropriate…”. The example he gives concerns failures to comply with statutory formalities in relation to annuity contracts.

I draw two conclusions from this discussion. First, there is no longer any general public policy rule of English law that either prevents or restricts the right to claim restitution of money advanced under a borrowing contract that is void as being ultra vires the borrower. Secondly, however, it is well established that if such a claim is inconsistent with the express provisions of a statute or, I would say, its clear intention, then English law will not permit the claim as a matter of public policy. That is because a common law claim for restitution cannot be allowed to circumvent legislation whose object and effect is to bar such a recovery. I agree with Etherton LJ that the question of whether there is any other category of public policy (wide or narrow) that is capable of defeating a restitution claim for unjust enrichment, separate from the defence of “change of position”, has not previously been decided.

Mr Milligan did not advance any other specific basis on which public policy could restrict Depfa’s right to make its restitutionary claim. This therefore leaves open two groups of questions which arise from Mr Milligan’s argument that effect should have been given to the judge’s finding at [139] of his judgment, quoted above. The first group is whether English law should, in principle, give effect to the provisions of the statute of another state which expressly provides or clearly intends that money advanced under a borrowing contract that is void, because ultra vires or invalid through a lack of substantive power, should not be recovered. If so, does that have the effect that a claim under English law for restitution can thereby be prevented or reduced in some way? The second arises if the answer to that question is “yes”. It is: on the findings of the judge, does section 50 of the 1992 Act expressly provide or clearly intend that money advanced to a Kommune under a “loan contract” should not be recovered by the borrower if the Kommune lacked “substantive power” to conclude the contract? And if so, how does English law give effect to that in an English law restitutionary claim?

Neither of these questions are dealt with in any detail in the judgment of Tomlinson J, doubtless because they were not argued in detail before him. Mr Milligan seemed somewhat reluctant to be drawn in to the question of whether English law should, in dealing with a restitutionary claim, somehow give effect to any provisions in a foreign statute that barred recovery of money advanced under what English law would regard as a void borrowing contract. Mr Pollock submits that it is not the job of an English court to give effect to public policy as stated in another state’s statutes, at least so far as concerns a claim for restitution in English law based on a void contract which was, potentially, to be governed by English law. He submits that there is no case that holds that an English court must give effect to the foreign state’s public policy in these circumstances.

On this point we were not referred to any cases. Usually it is the reverse situation that is examined in the English cases, ie. whether a foreign statute or rule of law or decision is contrary to English public policy. In the absence of authority to guide us, I have attempted to examine the question from first principle. Two approaches seem possible. The first is that the English court should take account of the express or clearly implied intention of the foreign statute in deciding whether and to what extent a restitutionary remedy should be available, even though the restitutionary claim is governed by English law. It should do so as a matter of comity and should only refuse to consider the effect of the foreign statute if it would be contrary to English public policy notions to do so. In short, this would be an English domestic law public policy approach. The second approach is to draw an analogy with the rule that an English law contract will not be regarded as unenforceable if prohibited by a foreign law, unless the contract requires performance in the place of that law or it is proved that it is the common intention of the parties to the contract to violate the law of the place of performance of the contract. (Footnote: ¹⁰⁵) That also would be applying a rule of domestic English law, as the cases recognise.

In the circumstances of the present case, my inclination is towards the first approach. Although the restitutionary claim is governed by English law and no English statute is involved, the reason a restitutionary claim has arisen is that the putative contract is void because of the lack of substantive power and so capacity of the foreign corporation to conclude the contract. The key element in the lack of substantive power is the relevant foreign statute, viz. the 1992 Act. Under the English conflict of laws rule the English court has to take account of that when deciding on the issue of the foreign corporation’s capacity to conclude a contract putatively governed by English law. If the consequence is that the contract is void and so, in English law, a restitutionary claim may arise, it seems logical and consistent with comity to take account of the same foreign statute to see whether, as a matter of English public policy, the right to a restitutionary claim should be restricted in some way. If this approach is correct, then it must be for the party claiming to rely on the foreign statute to do two things. First, it must prove, by evidence of the foreign law if need be, that the statute expressly or by clear implication bars recovery of money advanced under a void contract. Secondly, it must satisfy the English court that there is no countervailing English public policy reason not to give effect to the foreign statute.

Mr Milligan attempted to demonstrate that the express or implied effect of section 50 of the 1992 Act was to bar the right to any restitutionary claim beyond the sums recovered by the Kommunes upon liquidation of the investments obtained with the advances made by Depfa. He relied on the judge’s finding at paragraph 139, already quoted. He also relied on passages in Professor Dr Graver’s report and Professor Woxholth’s report and answers given by Professor Bräthen in cross-examination.

In my view the short answer to this point is that there are no findings of fact by the judge that the effect of the 1992 Act is (either expressly or implicitly) that recovery of money paid under a contract which is held invalid is barred or would be contrary to the statutory intent. There is, in my view, no evidence on which the judge could have made such a finding. Therefore, there is no factual basis on which Mr Milligan can mount an argument that, as a matter of public policy, Depfa’s right to a restitutionary claim must be limited to the value of the redeemed investments made with the sums advanced under the void contracts.

My conclusions on the “public policy” issue are therefore as follows: first, the judge did not misunderstand what Lord Goff stated in WLG at page 688. Moreover, what Lord Goff there stated accords with the effect of the majority decision to depart from the decision in Sinclair v Brougham on the relevant point. Secondly, the way that Mr Milligan now puts the case on public policy is not as it was put before the judge. It is therefore unjust to complain that the judge’s decision was wrong in principle. In any event, it is not. Thirdly, the judge’s decision is not contrary to authority. The truth is that there is no authority directly in point. Fourthly, the judge has not made findings of fact on whether the express or implied effect of the 1992 Act is to bar any claim to recover money paid under an invalid contract with the Kommunes or that such a recovery would be contrary to the statutory intent. It appears to me that he was not invited to do so; I am confident that if he had been, he would have taken care to record his conclusions.

Lastly, this is not an unjust result. The judge concluded, at [141] that Depfa acted in good faith in purporting to enter the “swaps” contracts. He also found that Depfa did not take the risk that the “swaps” contracts were invalid or that they intended that the Kommunes should keep the sums advanced if it should turn out that Depfa was mistaken as to the validity of the contracts: see [143] to [153] of the judgment. If the Kommunes were entitled not to repay what Depfa had advanced to them then, subject to the defence of “change of position”, they would indeed have been enriched and, I would say, unjustly so.

Accordingly, I would reject the Kommunes’ arguments that they are not liable to repay to Depfa the full amount of the sums advanced on the basis of “public policy”.

Before Tomlinson J the Kommunes’ argument was that they had changed their position by using the sums advanced by Depfa to buy, first, “CLNs” (Footnote: ¹⁰⁶) and then “CDOs” (Footnote: ¹⁰⁷) on the advice of Terra. However, the judge found (Footnote: ¹⁰⁸) that the Kommunes knew that, “…irrespective of the outcome of the investments, they would have to repay the loans …… the municipalities knew from the start that the amounts advanced by Depfa were to be repaid”. He also found that, in investing the money as they did, the Kommunes “…plainly assumed the risk of the success of the investment…” and insofar as the Kommunes intended to look to the sums advanced by Depfa as a source for repayment of the loans, the Kommunes “…deliberately took the risk that the investments into which they entered would lead to a shortfall”. (Footnote: ¹⁰⁹) The judge regarded those facts as fatal to the “change of position” defence. He regarded the case as indistinguishable from Goss v Chilcot. (Footnote: ¹¹⁰) Tomlinson J commented, in conclusion that:

“…the notion of the extent of success of a restitutionary defence of change of position depending upon the outcome of a speculative investment with borrowed money entered into by the payee at his own risk is to my mind quite extraordinary”. (Footnote: ¹¹¹)

Before us Mr Milligan first emphasises the fact that the Kommunes would not have made any investments in the CLNs and CDOs if they had not been advanced sums by Depfa. Secondly, he criticises the judge’s approach of looking at the Kommunes’ acceptance (at the time the “swaps” contracts were apparently concluded) that they realised that they would have to repay the loans. (Footnote: ¹¹²) Mr Milligan submits that the judge erred because this approach assumes that the loans were the result of valid contracts, whereas the premise is that they were not. Therefore the judge should have examined the position the Kommunes would have been in had the loans not been made at all. If so, then no investments would have been made. As it was, they received the money, in good faith, and made the investments and thereby changed their position, all in good faith. Lastly, Mr Milligan submits, relying in particular on statements of Lord Templeman in Lipkin Gorman v Karpnale Ltd, (Footnote: ¹¹³) that the test of whether there has been a change of position for the purposes of establishing a defence to a restitutionary claim is: did the recipient of the money (A) do something with the money (in good faith) that A would not have done but for the money being advanced under what was, in fact, a void contract. If A has so behaved, then he has changed his position and, to the extent that A has suffered a loss as a result of what he has done with the money, he does not have to make restitution of the sum lost, because A has not been “unjustly enriched” to the extent of the loss thereby suffered.

In my view, this topic needs to be considered under three heads. 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?

The law has been developed by the cases. As the judge stated, (Footnote: ¹¹⁴) a general principle of the defence of “change of position” to a claim for restitution of money where there had been “unjust enrichment” was first recognised in the House of Lords’ decision in Lipkin Gorman v Karpnale. (Footnote: ¹¹⁵) In that case a firm of solicitors sued a gaming club for the return of money that one of the firm’s partners, a compulsive gambler, had stolen from the firm’s client account and used at the club, where he made some winnings but a net loss. The gaming club argued that it should not have to repay any money because it had changed its position each time the gambler made a bet and it accepted the bet. The House of Lords held the firm could recover money gambled by the errant partner, but only to the extent that the gaming club had “won” the bets. To the extent that the club had “lost” to the gambler, it had changed its position in good faith.

Lord Bridge and Lord Goff both emphasised that the argument of “change of position” as a defence to actions in restitution must be allowed to develop on a case by case basis. (Footnote: ¹¹⁶) Lord Goff based the defence firmly on a broad principle of justice. So, in answer to the question of when would it be unjust to allow restitution, he responds: “.. where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, [so that] the injustice of requiring him to repay outweighs the injustice of denying the plaintiff restitution”. (Footnote: ¹¹⁷) Lord Goff said that the change of position had to be bona fide. But the defence was not confined to cases where the claim to restitution rested upon parting with money under a mistake of fact. (Footnote: ¹¹⁸) It was also available in cases where there had been a total failure of consideration, such as payment under a void contract, where there had therefore been a total failure of consideration. (Footnote: ¹¹⁹)

Mr Milligan relied heavily on the examples of change of position that were given by Lord Templeman in his speech. Lord Templeman said that a person who received money as a gift from a thief would be unjustly enriched because “…a donee of stolen money cannot in good conscience rely on the bounty of the thief to deny restitution to the victim of the theft”. (Footnote: ¹²⁰) But, Lord Templeman said, complications arose if the donee innocently expended the stolen money in reliance on the validity of the gift before the donee receives notice of the victim’s claim for restitution. He continued:

“Thus if the donee spent £20,000 in the purchase of a motor car which he would not have purchased but for the gift, it seems to me that the donee has altered his position on the faith of the gift and has only been unjustly enriched to the extent of the secondhand value of the motor car at the date when the victim of the theft seeks restitution. If the donee spends the £20,000 on a trip around the world, which he would not have undertaken without the gift, it seems to me that the donee has altered his position on the faith of the gift and that he is not unjustly enriched when the victim of the theft seeks restitution.” (Footnote: ¹²¹)

The next case to consider is Goss v Chilcott. (Footnote: ¹²²) I have already set out the facts. In the advice of the Privy Council given by Lord Goff, he stated that the effect of the unauthorised alteration of the mortgage deed by Mr Haddon was that Mr and Mrs Goss were discharged from their contractual liability to repay the sum advanced by the company and that was at a time when they had repaid nothing by way of principal or interest. Lord Goff concluded that in that circumstance the company was, in principle, entitled to recover the amount of the advance on the ground that the money had been paid for a consideration that had wholly failed, “…viz. the failure of the defendants to perform their contractual obligation to repay the loan”.

But that left the defence of change of position. The case was heard by the Privy Council on appeal from the Court of Appeal of New Zealand. The New Zealand Judicature Act 1908, section 94B, provides a statutory defence of change of position in cases of payments made under a mistake of fact or law. In such a case, if the defendant has received the payment in good faith and he has “altered his position in reliance on the validity of the payment”, then he will be protected by the defence if “in the opinion of the court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be”. The Board also noted that the development of the common law of restitution, based upon the principle of unjust enrichment, was such that there was now a widely recognised common law defence of change of position, which went beyond cases of mistake.

However, the Board rejected the argument that Mr and Mrs Goss had changed their position such that they had a defence to the claim for restitution. First, they were under an obligation to repay, which was not affected by the fact that the money had been paid (with the Goss’ authorisation) to Mrs Goss’ brother, Mr Haddon. Secondly, although the unauthorised alteration of the mortgage deed meant that there was no contractual obligation to repay the money advanced, they had still been enriched. Furthermore, they had paid over the money to Mr Haddon “…in circumstances in which, as they well knew, the money would nevertheless have to be repaid to the company. They had, therefore, in allowing the money to be paid to Mr Haddon, deliberately taken the risk that he would be unable to repay the money….”. Lord Goff concluded:

“The fact that [Mr and Mrs Goss] cannot now obtain reimbursement from Mr Haddon does not, in the circumstances of the present case, render it inequitable for them to be required to make restitution to the company in respect of the enrichment which they have received at the company’s expense”. (Footnote: ¹²³)

As Mr Milligan pointed out in argument, the facts are different from the present case. First, it was a case of subsequent discharge of liability by virtue of the unauthorised alteration of the mortgage deed by Mr Haddon. Secondly, the money was paid to Mr Haddon before the alteration was made by Mr Haddon and the alteration was made without the Goss’ knowledge or consent. Thirdly, it was found as a fact that the receipt of the money to Mr Haddon was a receipt by Mr and Mrs Goss, who had authorised him to receive it. Mr Milligan submits that the case is distinguishable and so Tomlinson J was wrong to say it applied to the present case.

In his book Unjust Enrichment, (Footnote: ¹²⁴) Professor Birks argued that Goss v Chilcott is a “problematic” decision which may have to be “reviewed” because, arguably, it fails to separate the cause of action in unjust enrichment from the nullified contract. It was argued that it is the defence of “disenrichment” which chiefly differentiates the action in unjust enrichment from an action in contract. The suggestion is, it seems, that because Mr and Mrs Goss had been “objectively honest” when they had parted with the money advanced to them by agreeing it should be paid direct to Mr Haddon, they were therefore in the position of having changed their position in good faith.

In Kleinwort Benson Ltd v Lincoln CC, (Footnote: ¹²⁵) one of the English “swaps” cases, Lord Goff rejected the idea that when a claim for restitution of money was made there could be a general defence of “honest receipt”, when at the time the money had been received by the defendant he honestly believed he was entitled to receive and retain the money. (Footnote: ¹²⁶) Instead, Lord Goff said that “the proper course” was to identify particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery should not be allowed.

In Dextra Bank & Trust Co Ltd v Bank of Jamaica, (Footnote: ¹²⁷) Dextra drew a cheque on its bankers, in favour of the Bank of Jamaica. Both banks were deceived by intermediaries as to the intention of the other and the intermediaries made off with the amount of the cheque. Dextra sued the Bank of Jamaica for the return of the sum paid by its bankers, claiming amongst other things, payment under a mistake of fact. The Bank of Jamaica resisted that claim on the basis (amongst other things) that it had changed its position, basing its argument on facts that had occurred prior to it actually receiving the cheque from Dextra; it said that it had changed its position in the expectation of receiving a benefit which it did, in fact, receive.

The advice of the Privy Council was given jointly by Lords Bingham and Goff. When dealing with the change of position defence, they said that there was no difference, in principle, between the case where a defendant expends money on an extraordinary expenditure in the expectation of receiving a sum from the plaintiff which he does receive and the case where such expenditure is made from a sum already received. In both cases the defendant will have “…incurred the expenditure in reliance on the plaintiff’s payment, or, as is sometimes said, on the faith of the payment”. (Footnote: ¹²⁸) The key was whether the change of position was made in good faith such that it would be inequitable to require the defendant to make restitution either in whole or part. (Footnote: ¹²⁹)

The last case I should refer to on change of position is the Court of Appeal’s decision in Niru Battery Manufacturing Co v Milestone Trading Ltd. (Footnote: ¹³⁰) The case concerned a lead purchase contract, which was financed by a letter of credit. The only part of the case that is relevant is the claim by the second claimant, Bank Sepah, which had opened the letter of credit, against the fourth defendant bank, Credit Agricole Indosuez, (“CAI”), which had received money under the letter of credit from Bank Sepah. CAI then paid the money received to third parties upon the instructions of those parties. It was common ground that Bank Sepah had paid CAI under a mistake of fact. CAI could only avoid a liability to repay in restitution if it could establish the defence of change of position. That, in turn, depended on whether the payment to the third parties had been made in good faith. Moore-Bick J had held that the defence was not available to CAI on the facts.

Clarke LJ gave the first judgment in the Court of Appeal. On this point he first referred to the speech of Lord Goff at pages 579-580 of Lipkin Gorman. Clarke LJ said that the emphasis in Lord Goff’s speech is upon whether it would be unjust or inequitable or unconscionable to allow restitution; not whether the defendant had been dishonest. (Footnote: ¹³¹) He concluded, on the facts, that the employee of CAI knew that Bank Sepah had paid the money under the letter of credit by reason of a mistake. Accordingly, good faith required that employee to enquire of Bank Sepah before paying away (on the instructions of another) the money CAI had received from Bank Sepah. The employee’s failure to make any enquiries of Bank Sepah meant that CAI had not acted in good faith and so could not rely on the defence of change of position. (Footnote: ¹³²) Sedley LJ emphasised that the touchstone of the defence of change of position was whether it was inequitable to allow the claimant to have restitution. There was not a simple good faith/bad faith dichotomy. (Footnote: ¹³³)

I think that the following propositions are obvious from the foregoing analysis of the cases. 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.

I have concluded also that the cases draw a clear distinction between two different types of circumstance, at least where money is concerned. The first is where the defendant obtains (or as in the Dextra case, is about to obtain) money in circumstances where he understands, in good faith, that it is his to keep and do what he likes with. Then that defendant spends the money, in good faith, on the basis of that understanding. The second type of case is where a defendant obtains money and, at the time of receipt, he understands that he will have to repay that sum at some stage in the future, which point has usually been identified between the payer and the payee, usually in a contract or what was, at the time, thought to be a valid contract.

This case is concerned with the second of the two situations I have identified. The Kommunes understood when they took the money from Depfa that they had to repay it, ultimately in the last, “bullet”, repayment at the end of what were thought at the time to be valid agreements. Admittedly those agreements were always void, but that cannot change the understanding on which the Kommunes received the money. At no stage did they think they had received a gift that would never have to be repaid. Furthermore, if the “swaps” contracts were void, then the cause of action for the claim in restitution for a consideration that had wholly failed must have arisen at the moment the money was paid over to the Kommunes.

I would accept that the Kommunes would not have made the investments via Terra that they did, “but for” the receipt of the sums from Depfa. I also accept that the Kommunes acted in good faith in making the investments and that any question of negligence or other criticism of those investments is irrelevant to this defence. But the Kommunes made those investments without any involvement by Depfa and the Kommunes made them on the understanding, at that stage in the history, that they had to repay the principal and interest to Depfa whatever happened to the investments. As Professor Virgo puts it in his book The Principles of the Law of Restitution, it is a question of “risk allocation”. (Footnote: ¹³⁴) The Kommunes took the risk in this case. There is no basis on which the defence of change of position can succeed.

So, it seems to me that the question here is: where lies the justice of the case; in favour of the party that received the money and took the risk (in good faith) that the investments might go down rather than up; or in favour of the party that paid over the money and had nothing to do with it thereafter, but thinking it was to be repaid in due course. Like the judge, I think that the answer to this question is obvious. The scales fall heavily in favour of Depfa recovering the full amount that it paid over to the Kommunes.

In my view Tomlinson J was clearly correct in saying that this case was indistinguishable from Goss v Chilcott on the application of the principle of the defence of change of position. The fact that in that case the contract only subsequently became unenforceable is not a valid distinction; the claim was in restitution on the basis of a total failure of consideration just as in this case. The Gosses allowed a third party, Mr Haddon, to take the money, in good faith, just as the Kommunes bought investments through Terra with the money paid by Depfa. In neither case was the money paid to the recipients as if a gift and then disposed of on the faith of an understanding (in good faith) that they were entitled to do with it what they wished.

Furthermore, I do not accept the criticisms of Goss v Chilcott made in Professor Birks’ book. Once it is accepted that, so far as the highest tribunal in England and Wales is concerned, there is no public policy reason to prevent restitution of sums paid under an ultra vires borrowing contract, there is no need to create an artificial restriction upon recovery to accommodate a distaste for permitting recovery of money paid under such a contract. Of course, if there has been a change of position that would make it inequitable or unjust to permit full (or even partial) recovery by the claimant lender, that defence will apply. But, on the facts of this case, there is no basis for doing so.

As before the judge, Mr Milligan argues that this means that the Kommunes have to bear losses now rather than in some years’ time if they have to repay the balance above the value of the investments sold. Like Tomlinson J, I have little sympathy for this argument. The Kommunes are responsible bodies who went into these transactions of their own accord. They hoped to benefit from the sums loaned. They took the risk by investing those sums. As the judge found, Depfa did not take the risk that the investments would fail.

Accordingly, I reject the Kommunes’ arguments on the change of position defence.

I have rejected WR’s arguments on the validity point. I have rejected the Kommunes’ arguments on their three lines of defence to the restitution claim. I would therefore dismiss both the appeal and the cross appeal.

Any local authority may raise a loan for the purpose of financing investments in buildings, installations and permanent operating equipment for its own use. A loan may be raised only in respect of measures that have been included in the annual budget.

Any local authority may raise a loan for the purpose of converting an older debt relating to a loan. Further a loan may be raised where this is essential to discharge liability for a guarantee.

Any local authority may raise a loan to ensure full cover in terms of insurance practice in any pension scheme for its own employees whether the municipality or the county municipality wishes to move the pension scheme from its own pension fund to an insurance company. The entitlement to raise a loan applies only if the lack of cover arose prior to 1 January 1998 and the loan must be redeemed to be essential.

Any local authority may raise a loan to ensure cover in terms of insurance practice in any pension scheme administered by an insurance company, where this is a requirement for becoming a party to the agreement on the transfer of accumulated superannuation rights, laid down in pursuance of section 46 of Act No. 26 of 28 July 1949 (Public Service Pension Fund Act). The entitlement to raise a loan applies only where the loan must be deemed to be essential.

Any local authority may borrow by way of overdraft or enter into an agreement on the right to overdraw.

Any local authority may borrow for the purpose of lending. A loan may be raised for the purpose of advancing money where an agreement for full repayment has been made. The condition is that recipients are not engaged in business activity and that the fund shall be used for investments,

The money owing on loans raised by local authorities shall be repaid in the following manner:

Any local authority may raise a loan for its own loans fund. For the use of loans funds the provisions of this section apply correspondingly.

A copy of a resolution to raise a loan is to be sent to the Ministry for Information. Local government borrowing shall be subject to ministerial approval in such cases as are mentioned in section 59a¹ of this Act.

I agree that the Kommunes’ appeal should be dismissed because they have no defence to the restitution claim of Depfa ACS Bank (“Depfa”), although my analysis differs in some respects from that of Aikens LJ. I would allow the cross-appeals on the validity of the swaps contracts to the extent of holding that the Judge applied the wrong test as to capacity, and, if Depfa or Wikborg Rein & Co (“WR”) wished to pursue the point, I would remit to the Judge for further findings the issue of the ostensible authority of the officials of the Kommunes to enter into those contracts. Before setting out my views below, I wish to pay tribute to the clear and comprehensive judgment of the Judge and to the excellent arguments addressed to us by all counsel.

There is no authority binding on this Court or, indeed, the Judge which requires the conclusion that the swaps contracts in the present case are to be treated in English law as void. That issue turns on the way in which English law chooses to interpret and apply Rule 162 in Dicey, Morris and Collins on The Conflict of Laws (14^th ed) (“Dicey’s Rule 162”). At the end of the day, however sophisticated the analysis and the arguments, that is a matter of policy. To say, as did Auld LJ in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 at page 407, that the underlying purpose of classification for settling a conflict of laws rule is “to strive for comity between competing nations” says nothing as to what the limits of such comity should be as a matter of policy. The analysis of the Judge and Aikens LJ in the present case as to the application of Dicey’s Rule 162 leads, in my respectful judgment, to a result which is counter-intuitive to an English lawyer and judge, is in marked contrast to the English law concept of corporate capacity, is not consistent with a sound policy objective, and is capable of producing bizarre consequences.

The English “ultra vires” concept of capacity makes a clear distinction between acts which are beyond the capacity of the corporation and are necessarily a complete nullity and acts which are beyond the power of the corporation and may or may not be valid according to the circumstances. The classic exposition is that of Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246, 304-305, as follows:

“The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company. As between the shareholders and the directors, for most purposes it makes no practical difference whether the transaction is beyond the capacity of the company or merely in excess or abuse of its power: in either event the shareholders will be able to restrain the carrying out of the transaction or hold liable those who have carried it out. Only if the question of ratification by all the shareholders arises will it be material to consider whether the transaction is beyond the capacity of the company since it is established that, although all the shareholders can ratify a transaction within the company’s capacity, they cannot ratify a transaction falling outside its objects.

In this judgment I therefore use the words “ultra vires” as covering only those transactions which the company has no capacity to carry out, i.e., those things the company cannot do at all as opposed to those things it cannot properly do.

The two badges of a transaction which is ultra vires in that sense are (1) that the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or not the third party had notice. It is therefore in this sense that the transactions in In re David Payne & Co. Ltd [1904] 2 Ch. 608 and Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch. 62 were held not to be ultra vires. The distinction between the capacity of the company and abuse of powers was also drawn by Oliver J. In re Halt Garage (1964) Ltd [1982] 3 All ER 1016, 1034.”

There is no difference as to the application of those principles to a company or any other corporation which has limited legal capacity: see, for example, in relation to local authorities, Hazell v Hammersmith and Fulham LBC [1990] 2 WLR 1055H-1056A, and Credit Suisse v Allerdale Borough Council [1997] QB 307. In English law the ultra vires concept of corporate capacity is inextricably linked with nullity: they are two sides of the same coin. The concept is simply that it is legally impossible for a corporation to give or do more than it has or is legally constituted to do, and no doctrine of deemed authority or estoppel can achieve a different result. If there are circumstances in which an unauthorised or otherwise unlawful transaction is capable of being enforced or is otherwise not a nullity, it cannot be beyond the legal capacity of the corporation to enter into it. In that sense our law has no concept of “partial” ultra vires incapacity: cf. para [43] of Aikens LJ’s judgment.

It is clear that Norwegian law has no general concept of corporate capacity equivalent to that in English law. It is also clear that, if English domestic law was applied to the facts of the present case, the swaps contracts would not be regarded as beyond the capacity of the Kommunes. The decisions of the Kommunes to enter into the swaps contracts do not fall within the Norwegian law concept of “nulliteter” which corresponds (in the context of certain administrative orders imposing obligations on citizens) closely to the nullity consequent on an English local authority acting without authority. They fall, rather, within the Norwegian law concept of “ugyldighet” or “assailable”: judgment para. [115]. The Norwegian court has a choice in the case of such an assailable resolution whether to declare the invalidity “ex tunc” (that is, from the date of the resolution itself) or “ex nunc” (that is, from the date of the declaration of invalidity); and a contract made in reliance on such a resolution remains in existence until struck down: ibid. Critically, a counter-party to a loan contract in breach of section 50 of the Norwegian Local Government 1992 (“the 1992 Act”) who has contracted with the local authority without notice and in good faith may enforce the contract: judgment paras. [118] and [121].

Fundamental to the reasoning of the Judge that, notwithstanding those matters, the swaps contracts are to be treated as beyond the capacity of the Kommunes for the purposes of Dicey’s Rule 162 was a distinction he drew between public and private law. In paragraph [114] he quoted part of the following passage from the judgment of Hobhouse LJ in Credit Suisse v Allerdale BC [1997] QB 306 at page 350:

“Where a statutory corporation purports to enter into a contract which it is not empowered by the relevant statute to enter into, the corporation lacks the capacity to make the supposed contract. This lack of capacity means that the document and the agreement it contains do not have effect as a legal contract. It exists in fact but not in law. It is legal nullity. The purported contract which is in truth not a contract does not confer any legal rights on either party. Neither party can sue upon it. This conclusion gives rise to no conflict between public law and private law principles. The role of public law is to answer the question: what is the capacity of the local authority to contract? The role of private law is to answer the question: when one of the parties to a supposed contract lacks contractual capacity, does the supposed contract give rise to legal obligations? When a plaintiff is asserting a private law right – a private law cause of action, typically a claim for damages for breach of contract or tort – the plaintiff must establish his cause of action. Any defence raised by the defendant must be one which is recognised by private law. Lack of capacity to contract is a defence recognised by private law.”

On the basis of that reasoning, the Judge concluded that the proper characterisation of the relevant Norwegian rule of public law was that the Kommunes “lacked the substantive power to conclude the swap agreements”; and the fact that a third party who had acted in good faith could enforce such a contract “is simply to be regarded as an incident of the Norwegian private law of contract, of itself having no significance in [that characterisation]”: judgment para.[122].

The Judge appears to have derived comfort, in reaching that conclusion, from a submission of Mr Milligan, which the Judge accepted, that “a useful analogy is to be found in Article 9(2) of the First Company Law Directive and in section 40(1) and (2) of the Companies Act 2006”: judgment para. [123]. Those provisions are as follows:

“Article 9.2

The limits on the powers of the organs of the company, arising under the statutes or from a decision of the competent organs, may never be relied on as against third parties, even if they have been disclosed.

Section 40

(1)

In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.

(2)

For this purpose—

(a)

a person ‘deals with’ a company if he is a party to any transaction or other act to which the company is a party,

(b)

a person dealing with a company—

a.

is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,

b.

is presumed to have acted in good faith unless the contrary is proved, and

c.

is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution.”

The Judge said the following in relation to those provisions in paragraph [123] of his judgment:

“In those circumstances where the company cannot rely on its lack of capacity, the contract is valid. However the existence of the superimposed rule does not change the nature of the underlying lack of competence. In those circumstances where the company can invoke its lack of capacity, the contract is invalid and the reason for the invalidity is the lack of capacity.”

Leaving aside fundamental changes to the ultra vires doctrine in relation to companies resulting from provisions of the Companies Act 2006, the Judge was wrong in the conclusion he drew from Article 9.2 and section 40 of that Act. Those provisions do not validate acts of directors which are outside the capacity of the company. They are concerned with the validation of acts outside the authority of the directors, but within the capacity of the company itself. They are therefore consistent with the general approach of English law on ultra vires corporate capacity, and are no support for the Judge’s interpretation and application of Dicey’s Rule 162.

In Credit Suisse Hobhouse LJ spent much of his judgment addressing the relationship between private law remedies and public law remedies in the context of the arguments of counsel both before the first instance judge and the Court of Appeal as to the relevance of discretionary remedies of judicial review (in the case, for example, of irrationality or improper motive) to a private law claim. The theme of his extensive analysis was that private law civil claims against a public law body must be decided in accordance with private law, and administrative law remedies are irrelevant to such a claim. The point that he was making in the passage quoted above was simply that a public body’s lack of capacity provides a defence to a civil law private claim because, and only because, lack of capacity is a private law defence. I do not see that this provides any assistance as to the application of Dicey’s Rule 162, and in particular whether it is the domestic English law concept of capacity, inextricably linked to nullity, which applies for the purpose of the conflict of law principle embodied in that Rule.

Turning to the analysis of Aikens LJ, I fully recognise and endorse the proposition that our conflict of laws rules are designed to strive for comity between competing legal systems, and, for that purpose, they may have to be formulated or applied in ways that do not slavishly reflect our own domestic law. The conflict of laws rule with which we are concerned is a rule of our common law. There is no authority which requires an interpretation and application of Dicey’s Rule 162 in such a way as to give the word “capacity” in that Rule any meaning other than its meaning in domestic English jurisprudence, namely one inextricably linked to nullity. I do not consider that the analysis of Mance LJ in Raiffeisen Zentralbank Osterreich AV v Five Star Trading LLC [2001] QB 825, especially at paragraphs [26] to [33], endorsing and following the approach of Staughton LJ in Macmillan, requires the Court to do so. It seems particularly inappropriate to do so in the context of an agreement, like the swaps contracts, which the parties have expressly agreed should be governed by English law.

The present case provides a good illustration of the difficulties to which the Judge’s approach gives rise: since Norwegian law really has no legal principle like our domestic law concept of ultra vires, the Court has to engage in a difficult and wholly artificial exercise in legal contortion to try to marry Norwegian law and the concept of legal capacity. According to the Judge’s analysis, the swaps contracts are outside the capacity of the Kommunes because they are loans in breach of section 50 of the 1992 Act, with the consequence that they are void because as a matter of English domestic law, which has been chosen by the parties as the law of the contract, that is the consequence of corporate incapacity, and even though they would be regarded as valid if capacity as well as the consequences of incapacity was also determined under English domestic law. They would still be void, applying the Judge’s approach, even if the circumstances were that they would be enforceable under Norwegian law by a counter-party which had acted in good faith. In the latter circumstance, as the Judge himself acknowledged in paragraph [127] of his judgment, the swaps contracts would be bound to be treated as void in the English courts, under a contract governed by English law, even though English domestic law would treat them as valid and enforceable and even though Norwegian private law would also treat them as valid and enforceable. That bizarre result is in the supposed interest of “comity”.

For those reasons, I consider that “capacity” in Dicey’s Rule 162 means capacity in the ultra vires sense of English domestic law.

In view of the decision of the Judge on capacity, the Judge did not have to deal with the question whether the officers of the Kommunes had authority to enter into the swaps contracts or the amendments to them, and so he addressed that issue very briefly in paragraph [124] of his judgment. He said:

“This conclusion renders it unnecessary to give separate consideration to the question of the actual authority of the individual officers of the municipalities to enter into the loan agreements. The officers obviously lacked such authority. However in case it is relevant I should state that I can in any event see no basis upon which the officers concerned had authority to enter into the amendments to the loan agreements. They may have had authority to correct an error or to change a minor detail in a manner consistent with the original resolution. Neither amendment falls into this category. The Haugesund resolution authorises a zero coupon swap whereunder Haugesund paid a fixed amount annually over eight years. An extension to nine years, in the context of legislation specifically seeking to protect future taxpayers against liabilities incurred in prior years, is obviously material. The Narvik resolution was to restructure property tax deriving from electricity generating stations over the next twelve years, the basis for the calculation being the net present value of the current level of the property tax and a trend projection. The amendment simply provided for a further loan quantified as the loss incurred on an investment. It bore no relation to anything authorised by the resolution.”

It is to be noted that the Judge only dealt there with actual authority, which is governed by Norwegian law, and not with ostensible authority, which is governed by English law. I can see no proper basis for disturbing the Judge’s conclusion as to the absence of actual authority to make the amendments to the swaps contracts. Nor can I see any reason why, in relation to those amendments, the position as to ostensible authority should be any different. So far as concerns the original swaps contracts, there was expert evidence before the Judge on which he was entitled to rely in concluding that, under Norwegian law, the Kommunes’ officers had no actual authority to make them. As I have said, the Judge did not consider, because he did not need to do so, whether the officers had ostensible authority. Counsel have made extensive submissions to us on ostensible authority, and what inferences relevant to that issue can and should be drawn from other findings and statements of the Judge, including issues as to what notice Depfa had of the unlawfulness of the Kommunes’ resolutions, whether the Depfa relied on those resolutions and the significance of the Judge’s express finding that Depfa acted in good faith. If Depfa or WR wished to pursue the point, notwithstanding the dismissal of the Kommunes’ appeal, I consider that, in all the circumstances, the best course would be to remit the case to the Judge for further findings on the question of ostensible authority.

I entirely agree with the masterly analysis of Aikens LJ in paragraphs [62] to [88] above on whether Sinclair v Brougham [1914] AC 398 remains authority that there can be no claim in restitution for money loaned to a corporation which had no capacity to enter into the loan agreement and which was void for that reason. I agree with his conclusion, for the reasons he gives, that Sinclair v Brougham was, in that respect, overruled by Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669.

I also agree with Aikens LJ’s conclusion that the Judge was right to reject the Kommunes’ defence to Depfa’s restitutionary claim on the ground of change of position and, insofar as it is different, public policy. I would, however, make the following points, some of which differ from his analysis, in that connection.

Mr Milligan submitted that the Court should not permit restitution in full from the Kommunes because that would undermine the Norwegian public policy underlying section 50 of the 1992 Act. I had originally understood his argument in that regard to be part of a change of position defence. By the end of his oral submissions in reply, however, I was not entirely clear whether that remained the case or he was advancing a quite independent defence based on public policy, that is to say a principle of English public policy that restitution would never be ordered if to do so would be contrary to the policy under the applicable law (whether English or foreign) which declares the transaction legally invalid. As Aikens LJ has pointed out, there is clear authority that a restitutionary claim for the return of money may be defeated where, on the correct interpretation of primary or secondary legislation, recovery in restitution would be contrary to the objective of the legislation: Boissevain v Weil [1950] AC 327, Dimond v Lovell [2002] 1 AC 384, Wilson v First County Trust Ltd (No. 2) [2004] 1 AC 816. I agree with Aikens LJ that this line of authority is quite distinct from a change of position defence. Those cases are best viewed, in my judgment, as examples of United Kingdom legislation which, on its correct interpretation, implicitly excludes any civil restitutionary remedy whether for unjust enrichment or otherwise. Whether there is a wider category of public policy capable of defeating a restitution claim for unjust enrichment, separate from the change of position defence, has not previously been decided.

Aikens LJ has placed Mr Milligan’s public policy argument based on section 50 of the 1992 Act, that is foreign legislation, squarely within an English public policy defence, distinct and separate from the defence of change of position. For my part, I can see no reason why policy issues, outside the line of authorities to which I have referred concerning the proper interpretation of United Kingdom legislation, should be excluded from consideration as one of the circumstances relevant to the defence of change of position; and I would be inclined to treat the Kommunes’ argument on Norwegian policy in that way. I agree with Aikens LJ, however, that, whether viewed as a separate English public policy defence or as a factor in a change of position defence, the Kommunes’ policy point faces the insuperable difficulty that there are no findings of fact by the Judge, and indeed there was no expert evidence, as to whether a restitutionary claim for the recovery of money paid under a contract invalid pursuant to section 50 of the 1992 Act would be regarded as precluded by the 1992 Act itself or in consequence of some wider principle of Norwegian public policy.

The broad principles underlying the change of position defence are well established. The defence is not fixed in stone, and has developed and can be expected to develop further over time on a case by case basis. Broadly speaking, the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require them to make restitution or alternatively to make restitution in full: Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at p. 580 (Lord Goff). Concepts of relative fault are not applicable; good faith being a sufficient requirement in this context: Dextra Bank and Trust Company v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER Comm. 193 at [38]. The defence is to be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim or to pursue it in full: ibid, and also Niru Battery Manufacturing v Milestone Trading Ltd [2003] EWCA Civ 1446 at [160] – [162] (Clarke LJ) and [190]-[192] (Sedley LJ).

I respectfully disagree with the Judge and Aikens LJ that the present case is indistinguishable in principle from Goss v Chilcott [1996] AC 788. On the unusual facts of that case, the policy which caused the loan agreement to be void (i.e. the line of cases stretching back to Pigot’s Case (1614) 11 Co. Rep. 26b) was triggered by an act which, on the face of it, was more to the disadvantage of the lender than the borrowers since it extended the time for repayment; that wrongful act was of someone who took under the borrowers and sought to benefit personally (albeit he was also legally the agent of the lender, and for that reason was able wrongfully to commit the act for his personal advantage); and (possibly for those reasons) no policy argument was advanced by the borrowers. I agree, however, that in the present case, as in Goss, the fact that the obligation and risk of repayment was assumed by the borrower, that is the Kommunes, is a relevant factor to be weighed in the balance in the change of position defence. So, in addition, is the fact that Depfa had no responsibility at all for the choice of investments made by the Kommunes, and whose performance and realisation (by redemption or sale) by the Kommunes caused the huge financial loss suffered by them.

In the light of those considerations, the fact that the onus of establishing the defence of change of position lies on the Kommunes, and that, for the reasons I have given, no weight can properly be given to the policy arguments advanced by them in respect of section 50 of the 1992 Act, the Judge was plainly entitled, and right, to reject the Kommunes’ invocation of the defence of change of position, and the appeal against that part of his judgment should be dismissed.

I agree with the conclusions and reasoning of Aikens LJ and consider only the question of the capacity of the Kommunes, as to which Aikens LJ and Etherton LJ disagree. They agree that Dicey Rule 162, cited by Aikens LJ at paragraph 27, is accurate and applicable. The Rule, as stated in the Third Edition of Dicey, at page 511, attracted an “inclination to agree” from a formidable source, Scrutton LJ, in Banque Internationale de Commerce de Petrograd v Goukassov [1923] 2 KB 682, at page 690.

Etherton LJ has found, at paragraph 143, that the word “capacity” in that Rule should not have “any meaning other than its meaning in domestic English jurisprudence, namely one inextricably linked to nullity”. Etherton LJ adds, at paragraph 145, that “capacity” in the Rule “means capacity in the ultra vires sense of English domestic law”.

I respectfully disagree. Once it is accepted that the capacity of the Kommunes is governed by Norwegian law, the English court should consider Norwegian notions of capacity even if they do not correspond with those in the law of England and Wales. I agree with the analysis of Norwegian law by the judge and Aikens LJ. In Norwegian terms, the acts of the Kommunes were “in excess of the capacity” of the Kommunes within the meaning of that expression as used by Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, at page 304C.

The judge was in my view correct to have regard to the evidence of Norwegian law before him and to conclude, at paragraph 123, that “a lack of substantive power to enter into an agreement can only properly be characterised as going to capacity”. I agree with the conclusions of Aikens LJ at paragraph 58 to 60.

English notions of ultra vires should not be imposed on the legal system which, under the English Rule, is the appropriate system for deciding on capacity. As Mance LJ stated in Raiffeisen Zentralbank Ősterreich AG v Five Star Trading LLC [2001] 1 QB 825, at paragraph 33:

“National courts must clearly strive to take a single, international or ‘autonomous’ view of the concept of contractual obligations that is not blinkered by conceptions - such as perhaps consideration or even privity - that may be peculiar to their own countries.”

With respect, I find nothing incongruous or illogical in a Rule which provides that the capacity of a Corporation is governed by its constitution and that all matters concerning its constitution are governed by the law of the place of incorporation. Once that is accepted in this case, analysis of Norwegian law is required and there is nothing artificial about it. I do not accept that, because that law does not incorporate English concepts of capacity, the analysis involves legal contortions. Norwegian concepts of capacity should be accepted in the English court. In the case of a particular contract, even one governed by English law, what may follow from the decision on the prior question of capacity does not determine the principle to be applied in deciding upon capacity.

I would dismiss both the appeal and the cross-appeal.