Conflict of laws relating to 'legal capacity' and Restitution

08/07/2010

A significant principle in relation to a party's capacity to enter into a contract was recently decided in the Court of Appeal. Specificially, the decision related to (1) the approach in interpreting the English conflicts rule relating to a corporation's capacity to enter into a contract, and (2) how English courts should deal with a public policy defence to a restitutionary claim based on a foreign statute.

Facts:

Depfa ACS Bank, an Irish bank (the "Bank") and two Norwegian local authorities (the "Authorities") entered into swap contracts which were governed by English law (the "Contracts"). The Bank was advised by Norwegian lawyers that the Authorities were not restricted under Section 50 of the Norwegian Local Government Act 1992 (the "Act") to enter into the Contracts, i.e. the Authorities had power and authority to enter into the same. The Act restricts the purposes for which the Authorities can enter into loan agreements.

The Authorities invested the monies advanced under the Contracts and suffered considerable losses. Shortly thereafter, the Norwegian government published an opinion that 'swaps' such as the Contracts were considered as loans for the purposes of Section 50. The Authorities then sought a declaration of non-liability to the Bank and argued that the Contracts were concluded ultra vires as a result of Section 50 which rendered them invalid and void. The Bank counterclaimed and alleged that the contracts were valid, or in the alternative, that it had a claim for restitution in respect of the sums paid to the Authorities.

Court of Appeal:

The Court of Appeal dismissed the appeal and confirmed the earlier decisions of the lower courts that whilst the Authorities did not have the capacity under its local law to enter into the Contracts, the Bank who was counterparty to the swaps had a right to recover the amounts advanced plus interest in restitution.

Under the Act, the Authorities lacked power to enter into the Contracts.

Lord Justice Aikens agreed with the trial judge that under English conflict rules, a lack of power to conclude under a contract of a particular nature such as those restricted under Section 50 is similar to a lack of 'capacity' under English law. The majority of the Court favoured an international approach towards the meaning of 'capacity' over a more narrow definition in accordance with domestic law. As such, the Contracts were held to be invalid and void.

Lord Justice Etherton dissented on the capacity issue and noted that parties expressly agreed that the Contracts were to be governed by English law. As Norwegian law did not have the concept of ultra vires, it was not only an artificial exercise but also counter-intuitive to an English lawyer and judge to reconcile Norwegian law with the English law concept of 'legal capacity'.

In respect of the restitutionary claim, the Court found that there was no previous authority to give guidance on dealing with a public policy defence to a claim in restitution. As such, it had to consider the express or clearly implied intent of the Act (particularly Section 50) in deciding if a restitutionary remedy should apply and if doing so would be contrary to public policy.

The Court held that there was no evidence that the recovery of money would be contrary to the express or implied intention of the Act. It also concluded that at the time of receipt, there was no doubt that both parties were aware that the Authorities had an unconditional obligation to repay the monies. It was not a situation where the Authorities thought that the monies was theirs to keep, e.g. as a gift. Consequently, the Court unanimously rejected the Authorities' defence of a change of position.

Note:
In addition to developing the English conflict of law rules and the laws of restitution, this decision is also valuable to lenders as it confirms that the principle that there can be no claim for restitution where money has been advanced under a void loan contract no longer exists.

Contact: xiaohanguo@city-law.net

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