857:, pp. 191–192 "Hammersmith compounded the managerial ineptitude that had already brought it to the brink of disaster. As an illustration of just how badly a local authority could be run, it might almost have been designed to accompany the first two of the Commission’s Management Papers. Neither the leader of the council nor any of its elected members had any idea what was happening in their finance department. Indeed, in view of the massive potential exposure so rapidly accumulated, it was questionable whether even the finance officers really understood what they were doing. (The Commission’s in-house lawyer, Tony Child, thought not.) None of them had sought any outside legal advice over derivatives, though they had been in the market since December 1983 and had been deep into speculative contracts since April 1987. The council’s own director of legal services was not asked for his views until February 1989. Letters from the auditor to the chief executive generally drew replies from the finance director (or, just as often, his deputy). And all of them seemed to be in a collective state of denial over the time-bomb ticking in their treasury."
433:(made up of the mayor and councillors), and though the powers of the council are limited by the Local Government Act 1972, it claimed the borough itself had all the powers of a natural person. The argument conceded that this would not save transactions entered into out of the general rate fund (which would presumably be most of them), but might save transactions funded from other sources. Lord Templeman stated "This argument strikes me as being not so much arcane as absurd." The argument drew on
28:
462:
suggestions were made that the decision might imperil London's reputation as a financial centre. The reaction of the local authorities is reported to have been mixed; whilst many councils were relieved of potentially large liabilities, their officials had nonetheless effectively been found to have engaged in unlawful conduct. Furthermore, the local authorities also had to face the unpleasant prospect of litigation to unwind the swaps.
233:, Duncan Campbell Smith paints a dramatic picture of the moments before the litigation commenced, with the slowly dawning realisation developing amongst the principals that somehow a very left-wing London borough council has managed to accumulate an extraordinarily large swaps exposure to the various banks simply to be able to collect and spend the premiums for entering into the trades. He describes a call from
370:
referred to as "parallel contracts" or "replacing" interest rates. Lord
Templeman noted quickly that "a parallel contract does not in fact replace the interest under the original borrowing and the swap transaction is a speculation no different in quality although different in magnitude from a swap contract which is not entered into by reference to any existing borrowing."
403:(1884) 10 App Cas 119 where the House of Lords held that granting powers to deal generally in a certain type of business did not mean that there is a potential necessity for entering into all manner of related transactions. Lord Templeman thought that reasoning directly analogous to the case in hand. Finally, Lord Templeman referred to the decision of
199:
period of time. In connection with that borrowing, certain local authorities sought to enter into swap transactions to hedge their exposure to fluctuations in interest rates. There were some doubts as to the ability of local authorities to enter into such transactions, but the local authorities sought the opinion of
278:, given that its activities were at the extreme end of the spectrum. In addition to being upset at the choice of Hammersmith (rather than a council which had made more responsible use of interest rate swaps), the various banks were also reported to have been upset by the decision for the case to be brought in a
657:
local authorities in which a local authority is plaintiff because they are net losers under their swap transactions. The number of plaintiff banks in these actions totals in all 42 and the number of local authority defendants 62. These figures may need up-dating, but give a substantially accurate picture."
369:
The second category was where swaps were entered into with respect to an existing loan to try and capitalise upon a change in interests. Accordingly, whilst they were also speculative in nature, they did directly relate to an existing loan exposure of the local authority. In the judgment these were
270:
When the district auditor (Tony Hazell) became aware of the scale of
Hammersmith and Fulham's activities in the swap market he brought proceedings to determine whether or not those activities were lawful. Although the case is reported as Hazell against Hammersmith and Fulham, in practice the various
262:
When Mr
Scrivener was asked to give a further opinion in relation to the matter, having been made better aware of the scale of the activities of Hammersmith, he advised that if one looked at all of the transactions in their totality, one could not say "these transactions were part and parcel of debt
249:
Davies duly returned the call. The banker happily explained again the reason for it. She was an
American, newly arrived in the London office. She worked on the swaps desk at Goldman and had been familiarizing herself with the book of the bank's existing positions. She’d been intrigued, she said, 'by
461:
The reaction of banks and financial institutions to the judgment has been described as "furious". Having entered into transactions with local authorities in good faith, the banks now found themselves embroiled in costly litigation to unwind hundreds of financial contracts at great expense. Various
432:
Lord
Templeman finally addressed what he referred to as the banks' "arcane" argument. Broadly, that stated that the incorporated Hammersmith and Fulham Borough (representing the concept of inhabitants as a whole group) could only act through the unincorporated Hammersmith and Fulham Borough Council
383:
Having almost immediately stated that all swaps were, in his view, conceptually the same as the types of swap which the banks had admitted were unlawful, Lord
Templeman then explored the limits of the powers of local authorities under the Local Government Act 1972. He sought to explore whether the
481:
The decision led to a torrent of litigation unwinding swap transactions entered into with local authorities. In his judgment Lord
Templeman referred to there being "about 400" open swaps between banks and local authorities. Many councils had multiple open positions. In a subsequent case management
656:
recorded that "As at 30th
October, 1991 there were 203 extant swap actions, 18 had been settled after the issue of proceedings, 2 had been discontinued and 4 are in progress in the Chancery Division. Although in the vast majority of cases the banks are plaintiffs, there are 10 actions involving 8
198:
Up until the early 1990s, a number of local authorities had been engaged in interest rate swap transactions as part of managing their debt portfolios. Under the Local
Government Act 1972, the local authorities had power to borrow in order to amortise their costs of capital projects over a longer
465:
Although
Hammersmith and its ratepayers were saved from a potentially massive and crippling financial exposure, the picture that the case painted was not at all a pretty one. And, as has been pointed out, for all the criticisms that are made of the chaos that the decision caused, ultimately, the
373:
The third category related to swaps also entered into in connection with an existing loan, where the local authority sought to use swaps to alter the proportion of the interest which was paid on either a fixed or variable basis through swap contracts. In the judgment these were referred to as
224:
Hammersmith's participation in the swaps market was on a massive scale which was in no way representative of the activities of the other local authorities in the swaps market. Those local authorities which had entered into the swaps market in a more responsible manner, with a view to the more
411:
where he said "The rule of law has been laid down in this House to the effect that it must be shown that the business can fairly be regarded as incidental to or consequential upon the use of the statutory powers." Lord Templeman held that "The same considerations apply in the present case."
587:
The Court of Appeal felt that if a local authority reasonably believed that it was subject to a liability (under the void swaps), then it had the necessary powers to take reasonable steps to mitigate that liability. Even if that meant doing more of what it should not have done in the first
250:
this guy Hammersmith'. Finding him (she persisted with the joke) on the other side of several Goldman contracts, and not knowing the name, she had made some inquiries. 'And I find this guy's real big in the market. In fact, he’s on the other side of everything. He's in for billions
399:(1880) 5 App Cas 473 where the House of Lords had held unequivocally that where powers are conferred upon a statutory corporation "what it does not expressly or impliedly authorise is to be taken to be prohibited". He referred further to the decision of Lord Selborne LC in
577:
Despite the banks' ire, this was fairly understandable. Because Hammersmith and Fulham had entered into so many swaps for so many different purposes, it enabled the court to make rulings which would cover the broadest range of scenarios, given it greater value as a test
225:
effective management of their debt portfolio, were not represented in the proceedings and so their voice was never heard. The excessive nature of Hammersmith's involvement in the swaps market may have coloured the perception of the courts ...
361:
gave a short concurring judgment. After recounting the facts and describing in brief terms what an interest rate swap contract is, Lord Templeman then expanded upon the facts, noting that the various swaps fell into three categories.
311:
and beyond the powers of the local authorities. It was noted, with no small sense of irony, that "the decision had the bizarre effect of 'benefiting the chief culprit' (Hammersmith), while hurting the more prudent local authorities."
881:, p. 217 "Having lost in the courts the banks opened their next attack on two fronts ... The second was to seek to persuade Parliament to introduce retrospective legislation to reverse the decision of the House of Lords..."
341:
Swaps which were entered into by local authorities once it became apparent that earlier swaps might be void to mitigate the damage caused by those void swaps (called the "interim strategy"), which it held were also
186:. Although this clearly caused difficulties for the banks and local authorities engaged in such swap transactions, it has been noted that the "swap litigation" was instrumental in developing the modern law of
597:
Hammersmith and Fulham LBC had entered into a total of 592 swaps, of which 297 were still open. However, Hammersmith was an outlier and most other councils had far fewer positions in the swap market.
254:
of the market! Anyway, I've asked about him and people have explained the Audit Commission is responsible for him. So I thought I'd call you up and let you know. This guy’s exposure is absolutely
267:
noted that although the total borrowings of Hammersmith were in the order of £390 million, it had entered into swap transactions with a total aggregate notional principal of £6,052 million.
1023:
384:"replace" and "re-profile" swaps could be said to be "calculated to facilitate" or were "conducive to" the power of the local authorities to borrow under section 111 of the statute.
439:(1612) 10 Co Rep 1 that the use of a common seal allowed a corporate to do anything that a natural person might do. This only applies to a corporation created by exercise of the
470:
functioned as it was supposed to - protecting persons (the ratepayers) from the effects of persons wielding executive power in doing things that they were not supposed to do.
415:
Having considered the weight of authority, Lord Templeman noted that, despite its title, debt management is not in itself a function. He also noted that in the case of
374:"re-profiling". Similarly, Lord Templeman determined fairly immediately in his judgment that these were in his view largely indistinguishable from parallel contracts.
282:
rather than in the Commercial Division of the Chancery Court, where a judge might have been expected to have greater familiarity with transactions of this nature.
203:
QC, a leading commercial silk, who had advised that if a "rate swap is undertaken as part of the proper management of the council's fund then ... the swap will be
271:
banks were joined as third parties, and Hammersmith and Fulham joined with Hazell in arguing that the swaps were unlawful and should not be binding upon them.
669:, p. 221 "There can be little doubt that the swaps litigation has made an enormous contribution to the development of the English law of restitution."
491:
522:
449:(1874) LR 9 Ex 224 at 263). But in the present case, Hammersmith, as a London borough, was a hybrid corporation created by royal charter under the
1028:
508:
320:
213:
366:
The first category was where swaps were entered simply to speculate. In relation to those swaps the banks conceded that they were unlawful.
502:
445:
346:
Both at first instance and in the Court of Appeal, the judgments were deliberately handed down at a time when the markets were closed.
964:
178:
Prior to the judgment, a large number of local authorities had entered into such swap transactions. Accordingly, the decision of the
324:
338:
Swaps which were part of managing the local authorities' interest rate exposure under their borrowing, which it held were valid; and
1018:
482:
hearing, Hirst J indicated that over 200 separate sets legal proceedings were ongoing. These are often collectively referred to as
179:
110:
38:
473:
The banks made some attempts to have retrospective legislation passed to legalise the swaps, but were not successful in doing so.
212:
Whilst most local authorities engaged in swap transactions on a prudent scale to manage their debt portfolios, the position of
1008:
977:
953:
912:
392:
328:
296:
279:
558:
483:
183:
106:
618:
548:
264:
238:
114:
1003:
388:
895:
118:
942:(1997). "Local Authorities and Swaps: Undermining the Market?". In Goode, Royston Miles; Cranston, Ross (eds.).
404:
1013:
419:
Parliament has expressly conferred upon them a power to enter into swap transactions. He finally concluded:
435:
358:
122:
160:
423:
In the result, I am of the opinion that a local authority has no power to enter into a swap transaction.
553:
450:
304:
156:
234:
172:
1033:
648:
300:
164:
295:
Recognising the importance of the point, the case was heard by two judges at first instance in a
307:. They delivered a judgment on 1 November 1989, and they held that the swap transactions were
316:
983:
331:
broadly divided the swap entered into by the local authorities into three different types:
8:
783:
2 AC 1, at 28A. "Basically therefore "re-profiling" is only an extension of "replacing.""
653:
167:
because they were beyond the council's borrowing powers, and that all the contracts were
486:. Many of these cases were settled before trial, but the cases which were not included:
274:
The banks were understandably upset that Hammersmith and Fulham were selected to be the
904:
973:
949:
908:
440:
200:
78:
416:
943:
939:
891:
840:
275:
217:
801:
The Building Societies (Prescribed Contracts) Order 1986 (SI No 2098 of 1986).
997:
242:
27:
357:
The main judgment was given by Lord Templeman, with whom all judges agreed.
838:
Wolmar, Christian (25 January 1991). "Money Market Deals Ruled Unlawful".
205:
187:
168:
619:"Hazell -v- Hammersmith and Fulham London Borough Council; HL 1991"
963:
Campbell-Smith, Duncan (2008). "Closing the Swap Shop, 1988–91".
216:
was different. Writing about the swaps litigation, Professor
1024:
20th century in the London Borough of Hammersmith and Fulham
327:
who handed down their decision on 22 February 1990. The
290:
144:
Resulting trusts, local authority, interest rate swaps
719:
717:
184:
torrent of collateral litigation unwinding such swaps
945:
Making Commercial Law: Essays in Honour of Roy Goode
492:
Westdeutsche Landesbank Girozentrale v Islington LBC
714:
349:The case was then appealed to the House of Lords.
335:Purely speculative swaps, which it held were void;
182:declaring such practices to be unlawful set off a
523:Morgan Grenfell & Co Ltd v Welwyn Hatfield DC
263:management so as to be lawful". In his judgment,
995:
704:
702:
49:Hazell and Others v Hammersmith and Fulham LBC
689:
687:
427:
962:
854:
708:
509:Kleinwort Benson Ltd v Birmingham City Council
378:
699:
684:
446:Riche v Ashbury Railway Carriage and Iron Co
171:. Their actions were held to contravene the
397:Attorney-General v Great Eastern Railway Co
938:
878:
866:
744:
693:
678:
666:
26:
642:
640:
1029:United Kingdom constitutional case law
996:
890:
837:
315:The case was appealed and came before
948:. Clarendon Press. pp. 201–238.
516:Kleinwort Benson v South Tyneside MBC
637:
409:Attorney-General v Mersey Railway Co
291:Divisional court and Court of Appeal
724:Hazell v Hammersmith and Fulham LBC
152:Hazell v Hammersmith and Fulham LBC
21:Hazell v Hammersmith and Fulham LBC
13:
559:Local authorities swaps litigation
14:
1045:
549:United Kingdom constitutional law
352:
972:. Allen Lane. pp. 188–205.
652:(unreported, 28 November 1991),
649:Re Interest Rate Swap Litigation
387:He referred to the judgments of
1019:1992 in United Kingdom case law
932:
884:
872:
860:
848:
831:
822:
813:
804:
795:
786:
777:
768:
759:
750:
738:
591:
581:
729:
672:
660:
611:
571:
499:Kleinwort Benson v Sandwell BC
1:
897:Swaps, Restitution and Trusts
604:
536:Kleinwort Benson v Glasgow CC
165:interest rate swap agreements
1009:English derivatives case law
530:Credit Suisse v Allerdale BC
476:
7:
542:
456:
379:Powers of local authorities
285:
10:
1050:
756:Also reported at 2 QB 697
554:English administrative law
451:London Government Act 1963
214:Hammersmith and Fulham LBC
163:had no power to engage in
159:case, which declared that
157:English administrative law
173:Local Government Act 1972
143:
138:
133:
128:
102:
97:
89:
84:
74:
62:
54:
44:
34:
25:
20:
564:
518:4 All ER 972, Hobhouse J
252:and all on the same side
193:
111:Lord Brandon of Oakbrook
1004:English trusts case law
526:1 All ER 1, Hobhouse J
436:Sutton's Hospital Case
425:
260:
227:
855:Campbell-Smith (2008)
709:Campbell-Smith (2008)
421:
247:
222:
1014:House of Lords cases
646:In his judgment, in
107:Lord Keith of Kinkel
905:Sweet & Maxwell
317:Sir Stephen Brown P
220:described it thus:
190:under English law.
989:on 23 August 2012.
428:The "arcane point"
417:building societies
229:In his 2008 book,
979:978-1-84614-068-6
955:978-0-19-826081-3
914:978-0-421-65650-5
879:McKendrick (1997)
867:McKendrick (1997)
745:McKendrick (1997)
694:McKendrick (1997)
679:McKendrick (1997)
667:McKendrick (1997)
484:the "swaps cases"
441:royal prerogative
201:Anthony Scrivener
161:local authorities
148:
147:
1041:
990:
988:
982:. Archived from
971:
966:Follow The Money
959:
940:McKendrick, Ewan
926:
925:
923:
921:
902:
892:Hudson, Alastair
888:
882:
876:
870:
864:
858:
852:
846:
845:
835:
829:
826:
820:
817:
811:
808:
802:
799:
793:
790:
784:
781:
775:
772:
766:
763:
757:
754:
748:
742:
736:
733:
727:
721:
712:
706:
697:
691:
682:
676:
670:
664:
658:
644:
635:
634:
632:
630:
615:
598:
595:
589:
585:
579:
575:
512:4 All ER 733, CA
405:Lord Loreburn LC
393:Lord Selborne LC
297:divisional court
280:divisional court
239:Audit Commission
231:Follow The Money
98:Court membership
30:
18:
17:
1049:
1048:
1044:
1043:
1042:
1040:
1039:
1038:
1034:Swaps (finance)
994:
993:
986:
980:
969:
956:
935:
930:
929:
919:
917:
915:
900:
889:
885:
877:
873:
865:
861:
853:
849:
841:The Independent
836:
832:
828:2 AC 1, at 39F.
827:
823:
819:2 AC 1, at 39C.
818:
814:
810:2 AC 1, at 37C.
809:
805:
800:
796:
792:2 AC 1, at 31D.
791:
787:
782:
778:
774:2 AC 1, at 27G.
773:
769:
765:2 AC 1, at 27D.
764:
760:
755:
751:
743:
739:
734:
730:
726:2 AC 1, at 26F.
722:
715:
707:
700:
692:
685:
677:
673:
665:
661:
645:
638:
628:
626:
617:
616:
612:
607:
602:
601:
596:
592:
586:
582:
576:
572:
567:
545:
479:
459:
430:
381:
355:
329:Court of Appeal
293:
288:
218:Ewan McKendrick
196:
121:
117:
113:
109:
69:
67:
58:24 January 1991
12:
11:
5:
1047:
1037:
1036:
1031:
1026:
1021:
1016:
1011:
1006:
992:
991:
978:
960:
954:
934:
931:
928:
927:
913:
883:
871:
859:
847:
830:
821:
812:
803:
794:
785:
776:
767:
758:
749:
737:
728:
713:
698:
683:
671:
659:
636:
609:
608:
606:
603:
600:
599:
590:
580:
569:
568:
566:
563:
562:
561:
556:
551:
544:
541:
540:
539:
533:
527:
519:
513:
505:
501:4 All ER 890,
496:
478:
475:
458:
455:
429:
426:
389:Lord Blackburn
380:
377:
376:
375:
371:
367:
354:
353:House of Lords
351:
344:
343:
339:
336:
292:
289:
287:
284:
265:Lord Templeman
195:
192:
180:House of Lords
146:
145:
141:
140:
136:
135:
134:Lord Templeman
131:
130:
126:
125:
119:Lord Griffiths
115:Lord Templeman
104:
103:Judges sitting
100:
99:
95:
94:
91:
87:
86:
82:
81:
76:
72:
71:
64:
60:
59:
56:
52:
51:
46:
45:Full case name
42:
41:
39:House of Lords
36:
32:
31:
23:
22:
9:
6:
4:
3:
2:
1046:
1035:
1032:
1030:
1027:
1025:
1022:
1020:
1017:
1015:
1012:
1010:
1007:
1005:
1002:
1001:
999:
985:
981:
975:
968:
967:
961:
957:
951:
947:
946:
941:
937:
936:
916:
910:
906:
899:
898:
893:
887:
880:
875:
869:, p. 216
868:
863:
856:
851:
843:
842:
834:
825:
816:
807:
798:
789:
780:
771:
762:
753:
747:, p. 211
746:
741:
732:
725:
720:
718:
711:, p. 188
710:
705:
703:
696:, p. 209
695:
690:
688:
681:, p. 208
680:
675:
668:
663:
655:
651:
650:
643:
641:
625:. 9 July 2015
624:
620:
614:
610:
594:
584:
574:
570:
560:
557:
555:
552:
550:
547:
546:
537:
534:
531:
528:
525:
524:
520:
517:
514:
511:
510:
506:
504:
500:
497:
494:
493:
489:
488:
487:
485:
474:
471:
469:
463:
454:
452:
448:
447:
442:
438:
437:
424:
420:
418:
413:
410:
406:
402:
401:Small v Smith
398:
394:
390:
385:
372:
368:
365:
364:
363:
360:
350:
347:
340:
337:
334:
333:
332:
330:
326:
322:
318:
313:
310:
306:
302:
298:
283:
281:
277:
272:
268:
266:
259:
257:
253:
246:
244:
243:Goldman Sachs
240:
236:
235:Howard Davies
232:
226:
221:
219:
215:
210:
208:
207:
202:
191:
189:
185:
181:
176:
174:
170:
166:
162:
158:
155:2 AC 1 is an
154:
153:
142:
137:
132:
129:Case opinions
127:
124:
120:
116:
112:
108:
105:
101:
96:
92:
88:
83:
80:
77:
73:
65:
61:
57:
53:
50:
47:
43:
40:
37:
33:
29:
24:
19:
16:
984:the original
965:
944:
933:Bibliography
920:10 September
918:. Retrieved
896:
886:
874:
862:
850:
839:
833:
824:
815:
806:
797:
788:
779:
770:
761:
752:
740:
731:
723:
674:
662:
647:
627:. Retrieved
622:
613:
593:
583:
573:
538:4 All ER 641
535:
529:
521:
515:
507:
498:
490:
480:
472:
467:
466:doctrine of
464:
460:
444:
434:
431:
422:
414:
408:
400:
396:
386:
382:
356:
348:
345:
314:
308:
294:
273:
269:
261:
255:
251:
248:
230:
228:
223:
211:
204:
197:
177:
151:
150:
149:
90:Prior action
85:Case history
70:1 All ER 545
48:
15:
623:swarb.co.uk
468:ultra vires
359:Lord Ackner
321:Nicholls LJ
309:ultra vires
206:intra vires
188:restitution
123:Lord Ackner
998:Categories
605:References
503:Hobhouse J
495:AC 669, HL
325:Bingham LJ
75:Transcript
477:Aftermath
276:test case
68:2 WLR 372
63:Citations
894:(1999).
735:2 QB 697
543:See also
457:Reaction
305:French J
301:Woolf LJ
286:Judgment
139:Keywords
93:2 QB 697
79:judgment
654:Hirst J
629:11 July
256:massive
237:at the
55:Decided
976:
952:
911:
588:place.
532:QB 306
342:valid.
66:2 AC 1
987:(PDF)
970:(PDF)
901:(PDF)
578:case.
565:Notes
194:Facts
35:Court
974:ISBN
950:ISBN
922:2015
909:ISBN
631:2015
391:and
323:and
303:and
209:" .
169:void
407:in
395:in
241:to
1000::
907:.
903:.
716:^
701:^
686:^
639:^
621:.
453:.
319:,
299:,
258:.'
245::
175:.
958:.
924:.
844:.
633:.
443:(
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.
