UK: If A Lender Lends Money Under A Contract Which Subsequently Is Found To Be Ultra Vires, Is The Lender Entitled To Recover That Money By Claiming Restitution?

This is a case reminiscent of the "interest-rate swaps" litigation in which the House of Lords eventually held that English local authorities did not have the power to conclude such transactions. Here Norwegian local authorities entered into "swaps" transactions. These contracts went disastrously wrong and the local authorities lost about £26.7 million. The terms of the "swaps" contracts between the Norwegian local authorities and the bank contained English law and jurisdiction clauses.

Could the bank claim restitution?

The Court of Appeal concluded that although the swaps contracts were invalid and void there is no longer any general public policy rule of English law that either prevents or restricts the right to claim restitution. If, however, such a claim is inconsistent with the express provision of a statute then English law will not permit the claim as a matter of public policy. This is because a common law claim for restitution cannot be allowed to circumvent legislation whose object and effect is to bar such a recovery. Here there was no such legislation and so the bank could claim in restitution.

Could the local authorities rely on a change of position defence?

The Court of Appeal pointed out that at no stage did the local authorities think the transaction was a gift that would never have to be repaid. If the contracts were void, then the cause of action for restitution arose at the moment the moneys were paid to the local authorities. The court concluded that justice required that the local authorities repay the money. The local authorities received the money and took the risk (in good faith) that the investments may go up as well as down. Accordingly a change of position defence did not succeed.

Comment

This case demonstrates the flexibility of the law of restitution and will provide comfort to lenders.

• A lender is able to recover borrowed sums even where a contract has been held to have been void.
• Restitution cannot be used where legislation prevents recovery, but where a contract has been held to have been void, this is not a bar to a claim in restitution.
• Where money has been lent under a void contract and the borrower is aware that the money has to be repaid, the borrower takes the risk that an investment may go up as well as down and so justice requires that they repay the borrowed money.

Haugesund Kommune and Narvik Kommune v DEPFA ACS Bank and Wikborg Rein & Co [2010] EWCA Civ 579

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