Local authorities swaps litigation

Hammersmith and Fulham, where the genesis of the local authorities swaps litigation began.

The local authorities swaps litigation (sometimes called simply the swaps cases[1]) refers to a series of cases during the 1990s under English law relating to interest rate swap transactions entered into between banks and local authorities.[2] The House of Lords ruled that such transactions were unlawful.[3] As a result of the decision over 200 separate actions were filed as hundreds of interest rate swap contracts had to be unwound by the courts at great expense.[4]

The law relating to recovery of payments made under contracts subsequently held to be legally void was relatively undeveloped at the time, and the numerous cases led to a rapid evolution in terms of the development and understanding of the English law of restitution and unjust enrichment.[5] Many of the subsequent cases were appealed to the Court of Appeal and three were appealed all the way to the House of Lords. In the course of those proceedings, in addition to the development of English law of unjust enrichment, numerous long established legal precedents of general application were overturned.[6]

The situation was described as a "debacle",[2] and the final costs were enormous. There is no accurate record of the total legal costs over the totality of the legal actions, but the banks were estimated to have written off £600 million as either unrecoverable or compromised as part of the litigation.[7] No one has tried to produce estimates for any corresponding losses to the local authorities.

  1. ^ The reference "swaps cases" became less popular during the 2010s as a second wave of unrelated litigation relating to the mis-selling of financial products also came to be known as "swaps litigation" or "swaps cases". Charles Enderby Smith (14 September 2015). "Interest rate swaps litigation". Law Society Gazette. Retrieved 1 October 2015.
  2. ^ a b Eddie Cade (1999). Law Relating to International Banking. Routledge. para 2.2. ISBN 978-1-135-95221-1. the UK local authorities swaps debacle of the earfly 1990s, where the authorities were found to have lacked the contractual powers (vires) to be legally liable as swaps counterparties.
  3. ^ Hazell v Hammersmith and Fulham LBC [1991] 2 AC 1
  4. ^ In his judgment in Re Interest Rate Swap Litigation (unreported, 28 November 1991) Hirst J 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 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."
  5. ^ Ewan McKendrick (1997). Making Commercial Law: Essays in Honour of Roy Goode. p. 221. ISBN 0-19-826081-4. There can be little doubt that the swaps litigation has made an enormous contribution to the development of the English law of restitution.
  6. ^ This included (1) abolishing the rule in Sinclair v Brougham [1914] AC 398 that money paid under a void contract was irrecoverable, which had stood for over 80 years, (2) abolishing the old rule that money paid under mistake of law was not recoverable, and (3) substantially reforming the law and principles of resulting trusts in the decision handed down in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669. See generally Law of restitution below.
  7. ^ Duncan Campbell Smith (2008). Follow The Money (PDF). Allen Lane. p. 205. ISBN 978-1-84614-068-6. "The banks wrote off an estimated £600 million.