England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		4 September 2009

The Hon. Mr Justice Tomlinson :

Introduction

1. The Claimants in this action are Norwegian municipalities. The municipalities are at the bottom of the three-tier system of government in Norway, beneath the central government and the nineteen county authorities. There are 430 municipalities. They are autonomous bodies although their powers are limited by legislation. They are led by directly elected assemblies and have their own administrative officers. I shall refer to the Claimants as "Haugesund" and "Narvik" respectively.
2. The Defendant is an Irish bank, a subsidiary of Depfa Bank plc, which is owned by a German company. It specialises in public sector lending outside Germany. I shall refer to it as "Depfa".
3. To English eyes the litigation has some familiar features. Haugesund and Narvik were advanced money by Depfa pursuant to contracts which were called "swaps". Having invested imprudently the money advanced, sustaining massive losses, the municipalities deny their liability to the bank to repay the advances, relying upon their alleged lack of capacity ever to have entered into the transactions with Depfa in the first place. They rely upon a provision in the Norwegian Local Government Act 1992 which restricts their borrowing powers.
4. The transactions were the brainchild of Norwegian financial advisers Terra Fonds AS, subsequently Terra Securities ASA. I shall refer to this company as "Terra". Haugesund and Narvik acted on the advice of Terra, both as to the advances from or "swaps" with Depfa and as to the disastrous investments made with the proceeds thereof. In November 2007 the financial supervisory authority of Norway, Kredittilsynet, warned Terra that the revocation of its licence to provide financial services was under consideration on the grounds of its systematic violation of its duties. Terra's response was to petition for bankruptcy the following day. It is now in insolvent liquidation.
5. The Third Party in this litigation is Wikborg Rein & Co. Wikborg Rein is a well-known and highly respected firm of lawyers in Norway. Before entering into the "swap" agreements with Haugesund and Narvik Depfa sought the advice of Wikborg Rein on the question whether the municipalities had the power and authority to enter into them, which transactions Depfa pointed out were in fact loans. Wikborg Rein advised in unequivocal and unqualified terms that for the purposes of the Norwegian legislation the "swaps" were not in fact to be regarded as loans and that the municipalities had full power and authority to enter into and perform the agreements. In the event that it cannot recover, or recover in full, from the municipalities Depfa claims damages against Wikborg Rein for breach of contract and negligence.
6. Haugesund and Narvik are not the only Norwegian municipalities to have entered into transactions such as I have described in reliance upon advice from Terra. I am told that the episode is in Norway regarded as something of a national scandal. Litigation is apparently pending in Norway. Although the "swap" agreements are governed by English law, the approach of English law is to regard the question whether the municipalities had capacity to enter into the contracts as governed by the law of Norway, the law pursuant to which the municipalities are constituted. The liability of Wikborg Rein to Depfa is also governed by Norwegian law, although it is no longer suggested that in the relevant respects the law of Norway is any different from the law of England. The duties owed by Wikborg Rein to Depfa are the same as the duties which English law would in such circumstances regard as undertaken. However the impugned advice of Wikborg Rein relates to the capacity of the municipalities, or more immediately to the application of the Norwegian Local Government Act, both questions of Norwegian law. In these circumstances it is I think unfortunate that the English court should have to resolve this litigation before there is available from the Norwegian courts guidance on the central issue of Norwegian law, underlying as it does the Terra scheme which has resulted in widespread losses for municipalities in Norway. However the "swaps" are, as I have already mentioned, by express choice of the parties governed by English law and provide for the jurisdiction of the English court. Haugesund and Narvik have invoked the jurisdiction of the court, seeking on an expedited basis declaratory relief as to their non-liability to Depfa. Depfa for its part counterclaims in restitution in the event that the "swaps" are unenforceable against the municipalities. That counterclaim is governed by English law and Depfa is entitled to ask the English court to decide it, just as the municipalities are entitled to ask the English court for a declaration of non-liability. Wikborg Rein has not contested the jurisdiction of the English court and indeed could not successfully have attempted so to do. All parties invite the English court to resolve the disputes of which it is seised. It was only very shortly before the trial began that I became aware that Narvik is a defendant in Norway to a claim brought by a Norwegian bank arising out of a similar "swap" transaction. It is the contention of Mr Iain Milligan QC, for the municipalities, that the English court lacks the power to defer determination of the dispute until after the central issue has been considered by a Norwegian court. I do not need to decide whether that is so. However much I regret the lack of guidance from the Norwegian court, it quite quickly became plain to me that this court must now proceed to resolve the disputes of which it is properly seised and for the determination of which the parties had made expensive preparation.

Background

7. Many of the Norwegian municipalities have available to them in addition to locally raised taxes a source of revenue derived from the presence of power generating plants within the municipality. In some cases this is simply an entitlement to purchase electricity at a concessionary price and then to resell it at market price. In the case of Haugesund it is, relevantly, dividend and interest revenue which it derives from its shareholding in the local generating company Haugaland Kraft AS. In the case of Narvik it is, relevantly, a property tax imposed on power stations within the municipality. The basis for property taxation of power stations is the market value of the station, calculated according to a formula which has regard to a rolling average of the last five years' sales revenue minus operating costs. Norwegian municipalities enjoy a good credit rating.
8. It would seem that in 2001 Terra proposed to the municipality of Vik that it could increase its income by borrowing, at low cost, reflecting its good credit risk, the present value of its expected revenue from the resale of concessionary electricity and investing the proceeds in financial markets at a higher rate of return. The repayment schedule would reflect the expected revenues from the resale of electricity. No details are available of this transaction, except that it resulted in a "swap" agreement between DnB Markets, a Norwegian bank, and Vik and the consequent investment of funds by Vik in the financial markets. However it seems that the "interest rate swap" must have been a "zero coupon swap" whereunder the sole obligation of the bank was to pay to Vik the discounted present value of Vik's expected revenue from the resale of electricity over the next ten years, with the liability of the bank to pay interest reduced to zero.
9. In Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669 Lord Goff explained how an interest rate swap works and how it can become a form of borrowing. At page 680 he said this:

"Under such a transaction, one party (the fixed rate payer) agrees to pay the other over a certain period interest at a fixed rate on a notional capital sum; and the other party (the floating rate payer) agrees to pay the former over the same period interest on the same notional sum at a market rate determined in accordance with a certain formula. Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. They are in law wagers, but they are not void as such because they are excluded from the regime of the Gaming Acts by section 63 of the Financial Services Act 1986.

One form of interest rate swap involves what is called an upfront payment, i.e. a capital sum paid by one party to the other, which will be balanced by an adjustment of the parties' respective liabilities. Thus, as in the present case, the fixed rate payer may make an upfront payment to the floating rate payer, and in consequence the rate of interest payment by the fixed rate payer is reduced to a rate lower than the rate which would otherwise have been payable by him. The practical effect is to achieve a form of borrowing by, in this example, the floating rate payer through the medium of the interest rate swap transaction."

In the present case both parties were described as "fixed rate payers" with the rate of interest payable by Depfa, the "first fixed rate payer", reduced to zero. Depfa's liability was in each case to pay simply a "Fixed Amount".

10. In the Norwegian context the significance of an interest rate swap taking on the characteristics of a loan is that section 50 of the Local Government Act 1992 restricts the circumstances in which a municipality may borrow money. Borrowing is permitted only for certain budgetary purposes. Section 50 provides, so far as relevant:

"Section 50. Raising loans

1. 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.

2. 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.

3. Any local authority may raise a loan to ensure full cover in terms of insurance practice in any pension scheme for its own employees where 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 deemed to be essential.

4. 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 pursuant 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.

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

6. 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 funds shall be used for investments.

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

a. The total sum owing on loans raised by local authorities in pursuance of subsections 1 and 2 of this section shall be repaid in equal annual repayments. The remaining period of the municipal or county authority's overall debt may not exceed the estimated life of the municipal or county authority's equipment at the end of the last calendar year. …"

It will be seen that section 50.7a prescribes the manner in which a permitted loan must be repaid. From this and from subsection 1 it can be seen that underlying these restrictions is a philosophy that, putting it broadly, one generation should not be permitted to saddle the next with debt. For completeness I should here set out also section 52 of the Act. That provides:

"Section 52. Financial administration

1. The municipal council and the county council shall themselves issue rules for the financial administration of the municipal or county authority.

2. The Ministry may by regulations issue further rules concerning disposition of funds that entails financial risk.

3. Local authorities shall administer their funds in such manner that a satisfactory return may be achieved, without the entailment of any significant financial risk, and with consideration for the fact that the local authority shall have funds to meet its payment obligations when such payments fall due."

The financial officers of the municipalities who gave evidence in this case told me that they did not consider that the investments which they made on the advice of Terra entailed any significant financial risk. History has shown them to have been woefully mistaken.

11. In the light of the restriction on the municipalities' powers, considerations such as those set out by Lord Goff evidently led the District Auditor for the County of Sogn, in which lies Vik, to question the lawfulness of the "swap" into which it had entered with DnB Markets. The auditor questioned the lawfulness of the swap on the grounds that the borrowing of money by a municipality for investment, other than in buildings, installations and permanent operating equipment for its own use, was prohibited by section 50 of the Act. The auditor therefore sought the advice of the Ministry of Local Government. The Ministry responded in a letter dated 20 September 2002, hereinafter referred to as it was at trial as "the Vik letter", saying that the swap should not be equated with a loan within section 50 because the future payment obligations were covered by the revenue from the energy licence fees. However, the Ministry questioned the appropriateness of such transactions and said that it would evaluate whether it might be necessary to subject them to regulation.
12. In view of its importance I set out below the full text of the Vik letter:

"RE. FINANCIAL SALE OF HYDROPOWER LICENCE AND THE RELATIONSHIP TO LOCAL GOVERNMENT ACT SECTIONS 50 no.1 AND 59a no.1

We refer to your letter of 25.6.02 regarding the Ministry's evaluation of the financial sale of an energy licence in Vik municipality seen in the light of the provisions of the Local Government Act relating to the raising of loans.

In its auditor's report for 2001, Sogn Auditing District wrote the following:

'In connection with the restructuring, the local municipal authority has entered into an agreement which secures the price of the energy licence for 10 years. This is valued at an annual payment of NOK 9,750,500. Through an 'interest rate swap' with DnB Markets, the local authority has agreed to pay this amount against a one-time payment of NOK 69,211,000. The local authority has through administrators invested this one-time payment in bonds and shares from 2002. It is our opinion that the interest rate swap must be equated with a loan, and pursuant to Local Government Act section 50 there is no opportunity to raise a loan to purchase shares and bonds. We therefore reserve the right to question whether the interest rate swap is lawful.'

The Ministry is requested to assess the case in light of the auditor's comments.

The term 'loan' is not defined in the Local Government Act. The term must thus be interpreted in light of the considerations which the provisions of the Local Government Act are meant to safeguard, between the national considerations and the consideration for a healthy municipal economic control.

A balanced national economic development requires control of the local authorities' use of resources in the short and long term. This requirement for balance is related to the annual budget and part of the State's control of the local authorities' revenues, and is a way of controlling in the short term local government expenditure over and above the revenues that stem from State transfers, taxes and user-payments. One method the local authorities have at their disposal to increase the use of resources in the short term is by borrowing. Based on consideration for State control of local authority revenues, a loan will involve a method whereby one binds future revenues against receiving a one-time payment today. As such, the Ministry believes that the agreement with DnB Markets has the same economic realities as a loan, in that Vik municipality received a one-time payment today against payment of an annual sum in the years ahead.

Local Government Act section 50 contains regulations about what purposes the local authorities can raise loans for. These regulations are based on the principle of financial responsibility and the view that the local authorities must maintain a level of activity that matches revenues in the long term. The agreement between Vik municipality and DnB Markets is part of a greater structure where the aim is to increase the return from the energy licence and give the local authority a one-time payment against an underlying cash flow related to the energy licence. In that respect, the agreement involves no uncovered future payment obligation where the local authority, which by borrowing, has to cover interest and repayments with revenues which otherwise could have been used for providing services. The Ministry finds that the agreement between Vik municipality and DnB Markets cannot be equated with a loan.

The Ministry wishes to emphasise that the municipal sector has a considerable effect on the national economy, and thus it is necessary to have adequate State control of local authority revenues. Effective control of these revenues means that the local authorities must give due consideration to the terms and conditions inherent in revenues frameworks and legislation.

The municipal authorities finance their activities through fiscal revenues and user fees. The Ministry places a question mark against transactions that provide this type of revenue. Financial agreements that have the same economic realities as a loan should in the regulations be equated with a loan. The Ministry will therefore evaluate whether it might be necessary to regulate the use of such agreements.

By entering into complex financial agreements with complicated risk structures, local authorities can find themselves exposed to even greater risk. The Ministry will generally underscore that it is important for local authorities to act as professional contractual parties with an informed approach to risk, and that they aim for minimum exposure to risk. In this case, the Ministry takes for its basis that Vik municipality has not taken any risk that violates current laws and regulations. Otherwise, the Ministry has not evaluated the degree of risk involved."

13. In the following year, 2003, Terra itself sought legal advice on the lawfulness of municipalities entering into similarly structured transactions involving the up-front payment of the present value of revenues expected to accrue to the municipalities through franchise charges related to power generation. They sought advice from Messrs Bjerknes Wahl-Larsen to whom I shall refer hereafter as "Bjerknes". Bjerknes is a law firm in Oslo. Advice was given by letter of 29 April 2003 by Mr Conradi Andersen of that firm. Mr Andersen advised that financing in this manner could properly be implemented in accordance with the Local Government Act and the other regulations affecting the use to which municipalities may put revenue accrued from power franchise charges. He identified that a point to be clarified with respect to section 50.1 is whether the transaction can be characterised as a loan. In that regard he said:

"The transaction outlined may have certain features in common with a loan. The municipality receives a one-off amount from a trustee (preferably a bank) and ensures that there is subsequently a cash flow to the trustee. This is where the similarity stops."

In the case he was asked to consider it would seem that the lump sum payable up-front had a current value larger than the current value of the funds coming from the franchise fees for the relevant period. That is not a feature of the cases with which I am concerned. However the essence of his reasoning is I think to be found in the following paragraphs:

"The main consideration for restricting municipal borrowing is not applicable to the transaction in so far as it can be said to relate to financial leasing. The key consideration behind the restrictions is the financial responsibility principle, which suggests that purchases that are fully consumed in the year should be paid for in full from the year's revenues. In Ot.ptp. 43 (1999-2000) it is stated as follows:

'Financing municipal measures by borrowing will always lead to a reduction of services in the long term. This is because part of the municipal revenues must cover the payment to the lenders for them to provide the funds for the municipality. These funds which could otherwise be used directly for the provision of services'

Furthermore, it is stated that

'the rules of the municipalities [A]ct on financial management are intended to contribute to … an economic management which ensures stable welfare provision in the short and long-term, and to ensure that the municipality, at the beginning of the new budget period, is that least as well equipped to discharge welfare tasks as at the beginning of the previous budget period. … The objection to borrowing is that it is future generations that will carry the cost of the provision.'

Assuming that the transaction took account of negative changes in taxation in the period, the transaction in any case will not mean that there will be an uncovered repayment obligations that could be offset against future services or entail a burden for future generations. The transaction would be more likely to have the effect that the municipality intended to achieve: the municipalities receive greater returns from their assets. This is good economic management that gives also the municipality freedom of action in the long term.

Another really important factor is that the transaction is virtually identical to what several municipalities have done in relation to franchise power. A financial transaction with the sale of franchise power was accepted by the Municipality and Regional Department by letter dated 20 September 2002 to fall outside the provisions of the Act on borrowing."

The reference in the first and second paragraphs is to a statement in the "Proposition to the Odelsting", a consultative stage within the Norwegian legislative process, which in this case preceded the amendment to the Local Government Act 1992 which led to its current form. I discuss the nature of the amendment hereafter. It is common ground that in the Norwegian legal method it is a proper approach to have regard to such "travaux preparatoires" when construing the ensuing legislation. The reference in the last paragraph is of course to the Vik letter.

14. The content of the Vik letter was summarised and repeated by the Ministry of Local Government in its Circular H-15/03 dated 1 July 2003. In material part that read:

"The Department has received a question from a local authority ombudsman about the financial sale of franchise power and compliance with the rules of the Municipalities Act on received loans. The background to the case was that a municipality had concluded an agreement which secured the price of the franchise power of the municipality for 10 years in advance. Through an interest swap agreement with a financial institution, it was agreed that this cash flow would be paid to the municipality in the form of a one-off amount corresponding to the current value of the cash flow. The audit department of the municipality considered that the agreement should be regarded as equivalent to a loan.

The Department made the basic assumption that the concept of loan is not defined in the Municipalities Act, but that the concept must be considered in connection with the purpose which the Municipalities Act is intended to serve, including national supervision and supervision of sound local authority financial management. In the light of the balance requirement, the department considered that the interest swap agreement, to that extent, had the same economic reality as a loan, but that the basis for the provisions of section 50 no.1, including the financial liability principle and the reference to a stable level of activity in the municipalities, mean that the agreement cannot be equated to a loan."

Professor Graver, one of the expert witnesses at trial as to Norwegian law, explained that the reference here to "the balance requirement" is to the balance between earning and spending. The philosophy underlying the restriction enshrined in section 50.1 of the Act is that current expenditure should not exceed current income.

15. It was against this background that Terra first presented the "zero coupon swap" concept to Depfa in May 2003. They found a willing and enthusiastic listener in Mr Ole Witmeur who worked for Depfa in Copenhagen as a "Public Sector Originator". The Norwegian market had historically been dominated by one or two local Norwegian banks and it was difficult for outsiders to achieve entry. Mr Witmeur was extremely keen on a new vehicle which appeared to offer the opportunity to interest the municipalities in longer-term financing than they had hitherto historically undertaken.
16. In the light of arguments deployed against Depfa by both the municipalities and Wikborg Rein it is right that I should notice that in Mr Witmeur's note of his initial meeting with Terra to discuss this concept, which took place on 16 June 2003, he referred to it as "a way of circumventing the legislation". Even Mr Witmeur however recorded in the same note that should the proposal end up having the interest of Depfa, Depfa should possibly ask for its own legal opinion, additional that is to the Vik letter and to the Bjerknes opinion with which Mr Harald Norberg of Terra had at this meeting promised to supply him. Without Mr Witmeur's persistent championing this proposal would I think never have got past the Depfa credit committee. When ultimately it did, there was never any doubt in the minds of those responsible, who did not include Mr Witmeur, that Depfa could not and would not proceed without the benefit of external legal advice.
17. Matters were taken forward at a meeting between Terra and Depfa in Dublin on 12 August 2003. Amongst others in attendance were Fiona Flannery, a Senior Credit Manager at Depfa and a member of the Credit Committee, and Philip O'Sullivan of the Depfa Legal Department. At this meeting Mr Witmeur said that the Norwegian Ministry of Local Government and Regional Development had given approval for the use of zero coupon structures "on the basis that they are connected with the annual cashflow from the taxes and power plant". Mr O'Sullivan, who was as I understand it an Irish qualified lawyer with no expertise in Norwegian law, said at the meeting that Depfa would need an external legal opinion to confirm the legality and enforceability of such a structure.
18. Following that meeting there ensued a dialogue within Depfa as to whether to pursue the matter. It first came before Depfa's Credit Committee on 14 October 2003 in relation to an application from Bremanger, a small municipality. The application was declined on the basis of Bremanger's credit risk. The Credit Committee also made a number of comments about the nature of the business, including a concern expressed by Dr Grzesik that it "appeared to be more investment banking oriented" and "that it was not a transaction which would benefit the economy of the municipality". At this stage, as Ms Flannery explained, the Credit Committee did not have any strategic guidance from the Executive Committee as to this type of business. Neither did it have the comments from Depfa's Legal Department, which it noted were awaited, let alone an external opinion.
19. Mr Witmeur, who was of course the originator of the Bremanger proposal, was both surprised and disappointed at the Credit Committee's decision, and on 17 October 2003 he prepared a draft memorandum to the Credit Committee which he forwarded also to his superior, Mr Juergen Karcher, a member of the Executive Committee. At the same time, the Credit Department produced a draft Credit Application in relation to Haugesund, which recommended declining the credit on the basis of the proposed business, rather than upon the credit rating of Haugesund, which it deemed satisfactory. A credit analyst, Matthew Lloyd, identified three weaknesses in the proposal, which he expressed as follows:

"Proposed financing is not driven by the municipality's budgetary needs and in no way benefits the municipality's operating or capital budget

Risk of speculative investment since municipalities are not contractually obliged to invest prudently

Legislation risk – while the proposed 'swap' does not violate Norwegian law, the Ministry of Local Government has expressed reservations about this type of transaction and has stated that it will consider legislation to curb such activity in the future."

In the light of the Credit Department recommendation Ms Anne Butler of Client Transaction Management decided to withdraw from the agenda for the next meeting of the Credit Committee on 21 October 2003 both this application and another similar application from the neighbouring municipality of Karmoy.

20. Attached to the Haugesund Credit Application had been the comments of the Depfa Legal Department in the shape of a memorandum prepared by Mr O'Sullivan. In it he considered the Vik letter and the Bjerknes opinion with which he had been supplied by Terra. Again I must set out the contents of this memorandum in full:

"Norwegian Municipalities' Financing of Licence Fees using zero coupon swaps

Norwegian municipalities have turned to using zero coupon swaps to obtain the present value of concession fees due from power providers over a certain period. In reply to a query from a municipality's auditor, the Ministry of Local Government and Regional Development opined as to its view of the zero coupon structure.

In its opinion, the Ministry arrived at the view that the structure did not amount to a 'Loan' primarily because it did not imply an unfulfilled duty of payment on the part of the municipality, depriving the municipality in the future of funds that could be applied in the provision of services. This financing, so the logic of the Ministry, by linking itself to future fee payments, was not depriving the municipality of its capacity to provide services in the future, the way a loan would. Of course, this reasoning itself implies that the interest payable on a loan is greater, and therefore more burdensome, than the amount of the fee payments forgone.

However, while the Ministry permits the use of this structure, it does so reluctantly stating it is 'dubious to financial transactions that yield this type of revenue' and 'will therefore consider whether it may be necessary to lay down regulations that limit the use of such agreements'. The risk is that any departure by the municipality from the principles of sound financial management of its funds, using zero coupon swaps or other instruments, will lead to regulation and possible prohibition of financing of this type.

In a legal opinion aimed at examining the legal basis of the zero coupon structure, lawyers Bjerkens Whal-Larsen (sic), have opined that the swap would not be in breach of current or planned laws, as it does not amount to a 'Loan'. The main plank in their argument is that this financing does not imply an unfulfilled duty of repayment that could affect future services offered to lead to a strain on future generations, echoing the language used in the Ministry's letter.

The critical factor in differentiating a zero coupon swap from a loan is the burden it can impose on a municipality, and by extension, its citizens. The burden would be increased by a fall off in the level of fees payable by the electricity suppliers or by their default in payment altogether. That in turn would move the transaction closer to being characterised as a 'Loan' and therefore prohibited. Were the municipality, furthermore, to engage in unsound financial management with the funds received under the swap, then a burden on the citizens could be said to have been created as an indirect result of the swap.

Again, while strictly speaking legal, it is probably more meaningful to state that the swap is not illegal, not yet at least. Interpreting both the Ministry's letter and the legal opinion, the grounds for legality are contingent on (1) the fee payments from the electricity suppliers continuing unabated at least their current level and (2) the financial management policies of the municipality remaining sound."

21. Mr Witmeur was again surprised and disappointed at the recommendation of the Credit Department and he sent a memorandum to Mr Lloyd on 20 October 2003 making the point, amongst others, that what might happen in the future would not affect whether the transaction was legal or not at the time it was entered into. He also invoked, and obtained, the support of Mr Karcher for his proposal, although the documents do not reveal any reason given by Mr Karcher for espousing this view. There followed further internal debate within Depfa, in which further views were expressed about the merits of the proposed transaction. In an e-mail to Mr Witmeur of 21 October 2003 Mr Lloyd said this:

"I note your comments from yesterday. In my view this case could not be more straightforward; however I accept your point that legislation is unlikely to be applied retroactively and the transaction follows the letter of the law.

In your response, you do not address the point in my paper that this activity in no way related to the budgetary activity of the Municipality or its inhabitants. On the basis of this alone, I do not support this credit. I refer you again to the minutes of the Credit Committee meeting of 14 October in which Dr Grzesik expressed similar concerns."

In the course of this further debate Terra provided Depfa with a copy of an extract from Circular H-15/03, together with the contact details of a person to speak to at the Ministry, in fact the author of the Vik letter, albeit coupled with a request, passed on by Mr Witmeur, not to refer to any specific transaction. Neither Ms Flannery nor Mr Lloyd were further persuaded.

22. On 31 October 2003 Mr O'Sullivan sent to Mr Witmeur an e-mail in these terms:

"Following our meeting this morning I wish to clarify the uncertainty about the legality of the zero coupon swap structure you are proposing. We can be assured that the structure is legal under Norwegian law. For that we have the assurance of the Ministry responsible for the municipalities and an independent legal opinion. What was implicit in both the legal opinion and the views of the Ministry was that the legislature could change its assessment and pass a law prohibiting municipalities from entering those swaps. It would do so if circumstances changed and the municipalities were to lose money or suffer a burden as a result of this structure. It is my view that existing deals would not be affected, though we should request that Norwegian counsel confirm this."

Contrary to suggestions made at trial by Mr Gregory Mitchell QC for Wikborg Rein I do not regard this message as indicating that the legal issue "was now resolved". Nor do I regard this message as demonstrating any sea change in Mr O'Sullivan's thinking. There is no real difference between what Mr O'Sullivan said here and what he had said in his earlier memorandum. The language is different, but it does not in my view convey even a change of emphasis. Furthermore the exercise conducted by Mr O'Sullivan was never intended to be any more than an Irish lawyer's evaluation of the materials supplied by Terra. No doubt Mr O'Sullivan's view, particularly if even less encouraging, could have led to rejection of the proposal. However Mr O'Sullivan's assurance that the structure was lawful in Norwegian law would never have been regarded by Depfa as sufficient to enable it to proceed. Depfa would not have proceeded to enter into a transaction of this type in reliance alone upon its own Legal Department's evaluation of the Norwegian legal materials supplied by Terra. As Mr Pheifer, the Head of the Legal Department at Depfa, made clear, what Mr O'Sullivan was attempting was not Depfa's own analysis of the legal position, on which they were not qualified to express an opinion, what he was doing was simply reviewing the existing legal analysis proffered by Terra. Depfa would never have regarded this as a substitute for its own external objective legal advice from an appropriately qualified source.

23. On 5 November 2003 Mr Witmeur e-mailed Mr Karcher, updating him on the position, and referring to the concern about the use of funds which had been raised by the Credit Committee. He said that Credit and Legal had agreed that this point was not really a matter for the Credit Committee to decide upon, and it was "more a principal issue for Depfa Bank" by which he meant, I think, an issue of principle. Mr Witmeur specifically sought guidance as to which body within Depfa should consider this question of principle, i.e. the question whether Depfa should lend to municipalities for non-budgetary purposes. On 11 November 2003, following discussion with Mr Karcher, Mr Witmeur sent to him a summary of the business opportunity which had been prepared by Ms Anne Butler. The matter was then considered by Depfa's Executive Committee at the end of November and was referred back to the Credit Committee. A memorandum was produced for the Credit Committee by Ms Butler, which was sent to Mr Karcher for his comments, and was approved by him. It was considered at the Credit Committee meeting on 16 December 2003. Ms Butler was present at this meeting and Mr Witmeur participated by telephone from Copenhagen. Ms Butler made it clear to the Credit Committee that these transactions and the Norwegian market strategy had been explicitly approved by the Executive Committee, and had the support of the Board Member responsible for origination, Mr Karcher. As Ms Flannery explained, the Credit Committee now had strategic guidance as to whether this was business which the Executive Committee was willing to undertake, i.e. whether this type of lending, for non-budgetary purposes, was lending which Depfa was in principle prepared to undertake. With the benefit of that guidance the Credit Committee "agreed in principal (sic) with the product" noting however that the creditworthiness of the municipality would need to be satisfactory from a credit risk view.
24. Mr Mitchell submitted that at this point Depfa had committed itself in principle to the lending structure, subject only to the assessment of each individual credit risk, and that Depfa did not thereafter rely upon the advice of Wikborg Rein in entering into the transactions upon which they were already resolved. He even went so far as to suggest that had Wikborg Rein provided advice which cast doubt on the legality of the proposed structure Depfa would simply have gone to other Norwegian lawyers and that they would have had no difficulty in obtaining a favourable opinion. The latter is speculation. I shall return to the question of Depfa's reliance upon the advice given by Wikborg Rein, but at this stage I reject Mr Mitchell's characterisation of the effect of the Credit Committee's agreement in principle with the product. As Miss Flannery explained, it was outside the remit of the Credit Committee to consider legality, further than that of course it was assuming legality, as otherwise there would have been no purpose in giving approval in principle. However no transaction could proceed in reliance upon Credit Committee approval without the Legal Department being satisfied as to the legality and enforceability of the transaction. That, as Miss Flannery explained and as Mr Pheifer confirmed, was ultimately a matter for Mr Pheifer. By its decision the Credit Committee neither expressed an opinion on nor reached a conclusion as to the legality of the transaction in Norwegian law, the law of the place where the municipalities were constituted. Mr Iain Milligan QC for the municipalities suggested to Miss Flannery that after the Credit Committee had, on 13 January 2004, approved Haugesund's renewed credit application, it essentially handed the problem of legality over to the Legal Department or shut its eyes to it. Miss Flannery replied, consistently with all her other evidence, that the Credit Committee was passing the issue to Legal who could best address it. I accept Miss Flannery's evidence, which in any event accords with how one would expect any bank to proceed. Her evidence was entirely consistent with Mr Pheifer's understanding of his own role. Mr Pheifer likewise was an entirely reliable and straightforward witness.
25. As foreshadowed above, Credit Committee approval for the Haugesund application was given on 13 January 2004 in the shape of a limit of NOK 275 million with a tenor of ten years. It was not until May 2004 that the Haugesund application was taken further. It was then that Mr Pheifer sought advice from Norwegian lawyers. I shall describe that process in a little more detail hereafter. However it culminated in a written opinion from Wikborg Rein dated 30 June 2004, preceded by an e-mail of 17 June. Both were prepared by Mr Johan Rasmussen, a partner in the firm. In the e-mail message Wikborg Rein said that based on a circular from the Norwegian Ministry on Municipalities it was their opinion that the transaction was not a loan under the Norwegian Municipality Act. In its formal opinion letter Wikborg Rein expressed the unequivocal and unqualified opinion that Haugesund as a Norwegian municipality had in Norwegian law full power and authority to execute, deliver and perform the Agreement, by which was meant the ISDA Master Agreement, Schedule and Confirmation to which I refer hereafter. Wikborg Rein went on to state their opinion that the Agreement constituted in Norwegian law a valid and binding obligation of Haugesund.
26. I must now sketch in as briefly as possible the manner in which Haugesund and Narvik respectively became committed to the transactions.

Haugesund

27. Terra introduced the zero coupon swap concept to Haugesund at a presentation in Edinburgh on 19 August 2003 which was attended by representatives of various municipalities. In particular it was attended by Ms Gunbjorg Lothe, who was at all material times the Head of Finance and Budget employed in the administration of Haugesund to give support to the elected representatives. In this role she had responsibility for all matters related to finance, although she was ultimately answerable to the Chief Executive Hildegunn Staurseth. It was clear from the slides shown at the presentation that the purpose of the structure was to borrow at a rate based on the municipality's good credit risk and then to seek to make a turn by investing the proceeds.
28. Shortly after the August 2003 presentation in Edinburgh the idea emerged, although it is unclear from whom, of using Terra's zero coupon structure for the dividend and interest revenue from Haugesund's shareholding in the power company Haugaland Kraft. There followed a further presentation by Terra on 16 September 2003, on this occasion addressed to Haugesund and to Karmoy, a neighbouring kommune which was a co-shareholder in Haugaland Kraft. Terra raised the prospect of investing the proceeds of the swap in a Credit Linked Note, hereinafter a "CLN", a financial product which, as Ms Lothe understood, would involve Haugesund taking the credit risk of each of the underlying entities.
29. A further presentation took place on 11 November 2003, on this occasion attended also by Ms Staurseth and by the Chief Auditor of the municipality, Bente Syre. On this occasion Terra emphasised the risk involved in the management of the investment, and specifically stated in the presentation (in the first slide on page 10 of the printed version) that "a high expected return will include a high risk". The relationship between risk and reward was well known to Ms Lothe, and she accepted that it was "obvious" to her that there was in fact a risk of loss. Ms Lothe said that the risk was always presented as being very small, although the slide in the presentation from which I have quoted above would seem to indicate the contrary.
30. Following that presentation and further discussion within the administration of Haugesund, the administrative officers were persuaded by the proposal and believed that the risk inherent in it was an acceptable one for Haugesund to take. Ms Lothe and Ms Staurseth decided to present the matter to the elected representatives. Mr Norberg of Terra prepared a draft presentation which he sent to Ms Lothe on 15 December 2003. Ms Lothe then adapted this document and made it the basis for her own written presentation to first the Executive Committee and then the full Town Council which met on 11 and 25 February 2004 respectively.
31. Ms Lothe's proposal was that the municipality should enter into a zero coupon swap for NOK 230-240 million, that being equivalent to the net present value of the cash flow from Haugaland Kraft AS over the next eight years. It was further proposed that the proceeds should then be invested in either the purchase of single interest bearing papers (debenture bonds) or in a CLN, investment in which would be effected by Statkraft, a Norwegian entity. Ms Lothe's paper stated that "the bulk of the risk in this construction lies in the management and the credit risk we assume when placing investments". The paper suggested that "added value" generated through placement in the market in this way would be approximately NOK 20 million over eight years. The nature of an investment in debenture bonds and in a credit linked note was explained. Under the heading "legality of zero coupon swap" Ms Lothe quoted from the Ministry Circular No. H-15/03 the passage concluding "the agreement cannot be said to equate a loan". The Council resolved to adopt the proposal, opting for model two, investment in a CLN. The Council imposed as a condition that the Chief Executive should select the broker after a "bid competition" had been implemented. The meetings were presided over by Chief Councillor Petter Steen. His unchallenged evidence is that he did not understand either the structure or the details of the deal proposed. He was prepared to support it because it was recommended by his administration and by Terra – either Mr Norberg or Mr Opstad of Terra gave a presentation before the full meeting of the Town Council. Mr Steen derived the impression that the level of risk was very low, little more than that involved in depositing the funds in a savings bank. There was very little discussion and the resolution was passed unanimously.
32. The purpose of this transaction, as Ms Lothe appreciated, was to enable the municipality to make a turn on the sum advanced to it pursuant to the zero coupon swap, and to do so by borrowing that sum at a rate of interest which was lower than the return which Haugesund would hope to obtain from investing the proceeds in the financial markets through the CLN proposed by Terra. Ms Lothe recognised that this necessarily involved Haugesund taking a greater credit risk in its investment than would be taken by the counterparty under the zero coupon swap. She thought that the risk was small. Nonetheless, she appreciated that there was a risk.
33. It was clear both from the terms of Ms Lothe's presentation to the Town Council and from her oral evidence at trial that it was the intention of Haugesund that the amount advanced by the counterparty to the zero coupon swap would be repaid out of the cashflow generated by the investment in the financial markets. The revenues from Haugaland Kraft were not intended to be the source of the repayment. Haugesund intended to treat and in due course did treat that revenue in the same way as it had done in the past, i.e. as part of the normal income out of which it discharged its municipal obligations. That income was in no way hypothecated to repayment of the amount advanced. The expected revenues from Haugaland Kraft were used as the basis of the calculation of the amount of the up-front payment from, in the event, Depfa, but otherwise had no relevance to the structure of the transaction or to the repayment schedule. Ms Lothe fully appreciated that the investment risk, whether large or small, and she thought small, was being taken by Haugesund rather than by the counterparty to the swap. She appreciated that should for whatever reason the proceeds of the investment be insufficient out of which to repay the counterparty, then Haugesund would have to make up the shortfall out of its other resources. The liability to repay the counterparty would subsist whatever the outcome of the investment. In due course, entirely appropriately, the liability to repay Depfa was recorded as such in Haugesund's accounts.
34. On 14 June 2004 Mr Norberg of Terra e-mailed the Haugesund resolution to Mr Witmeur. By then of course Depfa had already accepted the Haugesund proposal in principle. On 17 June 2004, Mr Pheifer received by e-mail Wikborg Rein's opinion that the transaction was not a loan under the 1992 Act. "As of 22 June 2004" Haugesund and Depfa entered into the original zero coupon swap by which Depfa agreed to pay NOK 231,300,000 to Haugesund on 1 July 2004 and Haugesund agreed to pay (i) 31 quarterly payments, starting on 15 September 2004 and ending on 21 March 2012, of amounts varying from about NOK 3.5 million to about NOK 3 million, and (ii) a "bullet" repayment of NOK 216 million on 20 June 2012. The quarterly payments consist principally of interest although with a small element of amortisation. Depfa's payment and the quarterly and "bullet" repayments were described as respectively the "first" and the "second" "Fixed Amount".
35. The transaction was recorded in three documents which it was expressly agreed formed a single agreement:

i) an ISDA (International Swaps and Derivatives Association, Inc) Master Agreement;

ii) the Schedule to the Master Agreement and

iii) a Confirmation dated 22 June 2004.

The Confirmation contains the essentials of the transaction including, at Appendix 1, the repayment schedule. By section 3 of the ISDA Master Agreement, Haugesund expressly represented to Depfa (as at the date of both the original swap, and the amended swap):

i) By section 3(a)(ii), that "[Haugesund] has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that is required by this Agreement to deliver and to perform its obligations under this Agreement … and has taken all necessary action to authorise such execution, delivery and performance";

ii) By section 3(a)(iii), that "such execution, delivery and performance does not violate or conflict with any law applicable to [Haugesund], any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets…";

iii) By section 3(a)(iv), that "all governmental and other consents that are required to have been obtained by [Haugesund] with respect to this Agreement … have been obtained and are in full force and effect and all conditions of any such consents have been complied with";

iv) By section 3(a)(v), that "[Haugesund's] obligations under this Agreement … constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)."

Further, by section 4 of the ISDA Master Agreement, Haugesund expressly agreed:

i) By section 4(b), that it would "use all reasonable efforts to maintain in full force and effect all consents of any government or other authority that are required to be obtained by it with respect to this Agreement…";

ii) By section 4(c), that it would "comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement…".

36. With the approval of Ms Staurseth Ms Lothe did not conduct the "bid competition" envisaged by the Town Council with a view to looking at alternatives to Terra. She thought that it would involve a lot of work. Thus it was that Terra on 22 June 2004 bought a CLN, Cloverie 2004-33, from SEB Merchant Banking with a par value of NOK 327,500,000 at 99%, i.e. for NOK 324,225,000, for settlement on 15 July 2004. Part of that note was credited to Haugesund for NOK 228,690,000, being 99% of the par value NOK 231,000,000. The use of a CLN issued by Cloverie rather than Statkraft was I think another departure from the Council's resolution, although nothing turns on this either.
37. Under the terms of the CLN, Cloverie is a pass-through vehicle, promising to pay no more than it receives. It promises to pay two income streams to the holder, namely the coupon of three month NIBOR + 55 bps from Statkraft bonds maturing on 15 June 2011 and the fixed rate payments received from CitiGroup Global Markets Limited under a credit default swap on 23 corporate credits. Other than the credit risk of Statkraft and CitiGroup, the risk to the purchaser of the CLN is that one or more of the corporate credits defaults, in which event the recovery value of the defaulted credit is paid out to the purchaser, but the par value of the corporate credit is lost.
38. In March 2005 Terra offered Haugesund the opportunity to increase its credit exposure in the CLN, and thereby the returns from it, by increasing the number of credit reference entities to 125. This was agreed to by Haugesund, and as a result on 7 September 2005 Terra sold the CLN on behalf of Haugesund at 99% and on 15 September 2005 bought another CLN, Cloverie 2005-77, at par. This was presented by Terra as an opportunity to increase the total annual cash flow from the CLN by 50%. Ms Lothe appreciated that in order to achieve this higher cash flow the municipality was taking a greater risk.
39. The assumption of greater risk promptly led to a loss. At the end of 2005 one of the credits, Delphi Corporation, defaulted, resulting in a loss to Haugesund of NOK 3.5 million. It seems that Terra then suggested that the CLN should be replaced with a Collateralised Debt Obligation, hereinafter "CDO", apparently on the basis that this would be "more secure and flexible". Ms Staurseth and Ms Lothe, without any further consultation, agreed to the change. On 26 April 2006 Terra sold the Cloverie CLN and with the proceeds on 29 May 2006 bought a CDO issued by Libretto Capital Plc. This was certainly a more flexible investment, in that the Portfolio Manager, an entity wholly unknown to Haugesund, had the power to change the underlying reference entities. The investment involved significant financial risk, and was therefore made in breach of section 52.3 of the Act. It was not an investment to which the Haugesund Town Council had agreed.
40. The maturity date of the CDO was in June 2013. In order to accommodate this the maturity date of the "swap" with Depfa was extended from June 2012 to June 2013. This obviously resulted in a corresponding increase in Haugesund's liability to pay interest, although because of the element of amortisation included in the quarterly payments the bullet repayment became reduced by NOK 3 million. The Haugesund Town Council had of course approved a swap with an eight year tenor. Ms Lothe could recall no discussion surrounding this extension, although she accepted that it is likely that at the time she realised what she was doing. Although in view of my later conclusions it is I think academic, I should nonetheless record that in my view this amendment to the swap fell outside the scope of the original resolution and was thus unauthorised. This was the evidence of Professor Braathen, and it is consistent with the agreement of Professors Graver and Woxholth that only in relation to very minor amendments do officials employed by the municipalities have the power to undertake changes in relation to a clear municipal resolution. The resolution authorised only a swap with an eight year duration. Depfa was invited to agree to the extension of the maturity date of the swap and did so. There is no evidence that Depfa was told why it had become necessary to effect an extension. Depfa was at no stage consulted over Haugesund's investments.
41. By letter dated 21 January 2008 the County Governor of Rogaland in which lies Haugesund annulled the resolutions of Haugesund to make both the original investment in the CLN and the subsequent investment in the CDO. Implicitly he directed the sale of the Libretto CDO. I examine the decision of the County Governor in more detail at paragraphs 178 and 180 below. In the event the Libretto CDO was redeemed early at 42.54% on 20 February 2008, resulting in a loss to Haugesund of the order of NOK 125 million.
42. On 20 June 2008 Messrs Lund & Co, Norwegian lawyers instructed on behalf of Haugesund, wrote to Depfa and asserted that the interest rate swap agreements must in reality be considered to be loans, and further that the loan agreements were null and void, partly because the agreements were entered into in breach of the stipulations on loans laid down in the Local Government Act. Messrs Lund referred Depfa to a statement made by the Legal Department of the Ministry of Justice and the Police dated 28 January 2008, and also to a letter to all local councils and county councils from the Ministry of Local Government and Regional Development dated 18 April 2008. The statement made by the Legal Department of the Ministry of Justice and the Police to which Messrs Lund referred was in fact a letter of 28 January 2008 from that department to the Ministry of Local Government and Regional Development. By letter dated 20 December 2007 the Ministry of Local Government and Regional Development asked the Legal Department to assess whether the advice given in the Vik letter of 20 September 2002 was correct. In view of the relevance and importance of the letter of the Ministry of Justice to the issues in the case I propose again to set it out in full:

"Local Government Act section 50

In a letter dated 20 December 2007, the Ministry of Local Government and Regional Development (KRD) has required the Legal Department to assess whether the conclusion in KRD's letter of 20 September 2002 to the Chief Administrative Officer in Sogn og Fjordane is in line with Local Government Act section 50. In the letter, KRD concluded that an agreement entered into between Vik municipality and DnB Markets does not imply that the local authority took up a "loan" such as the term "loan" is applied in Local Government Act section 50.

The agreement between Vik municipality and DnB Markets was part of a larger financial construction organised by Terra Fonds ASA. The financial construction was called a zero-coupon swap. The aim was to exchange a number of cash flows (current revenues) from the local municipal authority's sale of an energy licence with a single cash flow (one-time payment), and thereafter invest the on-time payment in financial instruments. It was presupposed that management of these financial instruments would give Vik municipality a greater return from the energy licence.

On one side, Vik municipality entered into long-term agreements concerning the sale of the municipality's rights to an energy licence. The agreement was for 10 years and secured the municipal authority an annual payment of NOK 9,750,000, which corresponds to a total payment of NOK 97,500,000 for the entire period.

On the other side, Vik municipality entered into an agreement with DnB Markets which involved Vik municipality being paid a one-time sum of NOK 69,211,200 against an amount corresponding to the cash flows from the agreements concerning the sale of an energy licence being paid to DnB Markets.

The economic reality of this financial construction was such that the local authority exchanged a current cash flow with a duration of 10 years and totalling NOK 97,500,000 against a one-time payment of NOK 69,211,200.

The local authority also entered into an agreement with the Terra Group concerning management of this one-time payment.

The question is whether the agreement between Vik municipality and DnB Markets involved the local authority raising a 'loan' pursuant to Local Government Act section 50.

A natural understanding of the wording 'loan' suggests that one acquires a right to borrow or use something, in exchange for accepting an obligation to return that which is borrowed at a later date. The obligation to return the object can be determined by the nature of the object borrowed or on an individual basis. With the borrowing of money in the capacity of spending power, the obligation to return will be determined by the nature of the object borrowed.

In the contractual relationship between Vik municipality and DnB Markets, the local authority acquired the right to use money that belonged to DnB Markets, against the local authority accepting an obligation to repay the amount to DnB Markets over a ten-year period. The difference between NOK 97,500,000 and NOK 69,211,200 may be regarded as a borrowing cost, including interest. Whether this borrowing cost is high or low is, in our opinion, of no significance as to whether or not a 'loan' was raised. The expression 'loan' does not suggest that interest or other costs must be paid, or that repayment of the money must happen within specified deadlines or in a specific way. The wording only suggests that one accepts an obligation to repay that which is received, at a later point in time.

The wording suggests, therefore, that the local authority took up a 'loan'.

Thus, the question is whether there is a basis for departing from the wording.

From KRD's side, the decisive factor was that the overall financial construction meant that the payment to the municipal authority and repayment to DnB Markets had more of a character of being an advance rather than a 'loan'. It was stated that the local authority generally did not assume payment obligations that resulted in the local authority's freedom to manoeuvre financially being reduced. With reference to the fact that Local Government Act section 50 shall primarily limit the possibility of a local authority taking on long-term interest and repayment obligations at the expense of the municipality's provision of services, KRD accepted that the agreement between Vik municipality and DnB Markets did not involve the local authority raising a 'loan'.

In terms of the information received about the case, we must take as a basis that only the local authority which was the rights and obligations subject in the agreements concerning the sale of an energy licence, in the agreement with DnB Markets concerning the one-time payment, and in the agreements concerning investment of the one-time payment. From a legal point of view, therefore, it is our opinion that the total construction cannot be regarded as a package in which the agreement with DnB Markets was one of several elements. From a legal point of view, the relationship to DnB Markets must be evaluated in isolation pursuant to Local Government Act section 50.

As the case has been described to us, we further take as a basis that the local authority's obligation to pay DnB Markets NOK 9,750,000 a year for ten years exists regardless of what happens with the cash flows from the energy purchasers and with management of the one-time payment. In our opinion, therefore, the relationship to DnB Markets must be characterised as a 'loan' pursuant to Local Government Act section 50. Central to the term 'loan' is the obligation to repay that which is borrowed. This obligation rested with the local authority. It could only be possible to consider the payment from DnB Markets as anything but a loan if this obligation related to whether the energy purchasers actually paid or to the development of the investment. At any rate, we do not go into what relationship might have existed."

By its letter of 18 April 2008 the Ministry of Local Government and Regional Development advised local councils of the outcome of this consultation process, and directed them to act in accordance with the advice of the Legal Department of the Ministry of Justice. I understand that in Norway the views of the Legal Department of the Ministry of Justice are accorded great weight and respect.

43. On 8 September 2008 the Haugesund Town Council resolved that no further payments should be made to Depfa, with the result that no payment was made on the next due payment date, 17 September 2008.
44. By letters from Lund & Co dated 18 September and 13 October 2008 Haugesund offered to pay to Depfa the net proceeds of the investments which they had made with the money advanced.
45. Thereafter Depfa terminated the amended swap with effect from 31 October 2008 on the grounds of failure to pay in accordance with its terms, as they were entitled to do according to those terms. On 4 November 2008 Depfa advised Haugesund that the amount payable was NOK 232,379,029.95 together with interest.
46. From the initial advance of NOK 231,300,000 the net proceeds of the investments were NOK 96,777,994.44. In addition Haugesund had paid to Depfa under the original, followed by the amended, swap principal and interest totalling NOK 55,269,224.

Narvik

47. I can deal quite shortly with the manner in which matters developed at Narvik because the process was very similar to that which obtained at Haugesund. Narvik was first introduced to the "zero-coupon swap" concept by Terra on 23 April 2003. Terra in its paper described the model as "comprised of two integrated main elements: safeguarding a regular cash flow over a determined period and the exchange of cash flow from licensed energy revenue to a cash flow from the financial markets". This was followed up at the presentation in Edinburgh in August 2003 to which I have already referred which was attended also by Mr Svein Olaf Hestdahl, the person principally responsible at Narvik. Mr Hestdahl was at all material times adviser for the Planning and Strategy Department. His role was to deal with financial matters for the municipality, in particular to handle all budgetary and debt matters. He was answerable to the Chief Executive, who until July 2005 was Mr Stromme and after July 2005 Mr Trond Hermansen. There were further proposals from Terra in October 2003 and April 2004, which in turn led to Mr Hestdahl drawing up a paper for presentation to the Executive Committee and Town Council in June 2004.
48. The June 2004 proposal related to the proposed restructuring of licensed energy fees. This is not the proposal with which I am concerned. It was however approved unanimously by the Town Council on 1 July 2004, and in the event the transaction proceeded with DnB, involving an advance of NOK 52.5 million for a ten year period. It was invested in a Cloverie CLN.
49. The proposal with which I am concerned is a proposal to restructure the municipality's property tax which first appeared in a presentation made by Terra in May 2005. The property tax in question is that levied on power stations within the municipality. As happened at Haugesund, a draft paper for presentation to the Town Council was prepared by Mr Norberg and adopted and modified by Mr Hestdahl. The essence of the transaction is encapsulated in the following paragraphs from Mr Hestdahl's presentation:

"In that the Municipality's credit rating enables the Municipality to obtain cheaper credit than others, and at the same time place investments on the same terms, this can be exploited to gain additional dividends (additional income) from the fixed annual incoming cash flows provided by property tax.

The annual incoming cash flows from property tax are, at a certain rate of interest, recalculated to 'current worth' of the cash flows, i.e. the annual amounts are discounted to the current worth of these amounts. An amount equal to the said current worth is taken up on behalf of the Municipality in the financial markets on the basis of a pre-agreed cash flow from property taxes (zero-coupon swap).

By exchanging the current worth of property tax for the next twelve years for a given sum in today's financial market the Municipality will pay interest of approximately 4.5% per annum … The acquired sum can then be placed back in the financial market at an interest rate of approximately 6%. This restructuring is purely financial, and as such maintains the Municipality's future rights to regulate the levy (property tax). The additional revenues earned by the Municipality result from the difference in the interest rates for these two alternatives."

50. Before the proposal was put before the Council it was questioned by members of the Socialist Group. The Socialist Group could not understand why the proposed transaction did not amount to a loan, and questioned the wisdom and legality of borrowing power taxes in advance of their receipt. Mr Hestdahl told them that they were creating a problem which was not present. He pointed out that it was a borrowing arrangement which was approved by the Ministry. He described it thus:

"Briefly it involves that we borrow a discounted cash flow of the future income from property taxes from power plants. The cash flow which the property taxes give us is the security for the loan. By that very fact that the municipality can borrow cheap, it gives us an opportunity to place the money to a higher interest rate than what we borrow. The margin between the borrowing interest and the placement interest is locked in a twelve year period through an interest swap. This will give us a yearly yield of probably a place between NOK 1.3 and 1.6 million. Deducted fees of approximately NOK 1 million, this will give us an additional income between NOK 14.6 and 18.2 million over the next twelve years. In financial circles one usually name such arrangements as 'free lunch'."

Mr Hestdahl said in evidence that he believed at the time that it was accurate to say that the property taxes were security for the loan. He also told me however that he understood that the property taxes were not to be charged with the repayment obligation and that the bank was to be given no security interest in or over them. He accepted that on any view what he had said in answer to the Socialist Group was mistaken. Mr Hestdahl was I am afraid an unimpressive witness. It was clear that he gave absolutely no independent consideration to the proposal and was prepared simply to do what was suggested by Terra. I doubt if he fully understood the complexities of the investments proposed and ultimately made. Even so, I am satisfied that Mr Hestdahl understood the basic essentials of the transaction, which included that the advance was to be unsecured.

51. Like the paper prepared by Ms Lothe for Haugesund, the paper prepared by Mr Hestdahl for Narvik specifically identified "the main bulk of the risk the Municipality incurs in connection with the restructuring" as being "managing the arrangement and the risk incurred by the Municipality in connection with placement, i.e. the risk that the issuer … of one or more of the debenture bonds purchased by the Municipality enters into bankruptcy/is forced to halt payments". As with Haugesund, Narvik was offered two alternatives, the purchase of debenture bonds or the purchase of a CLN. It was clear from the proposal and Mr Hestdahl acknowledged that it was his understanding that the advance was intended to be repaid from the proceeds of the investment.
52. On 30 June 2005 the Narvik municipal council passed a resolution approving the restructuring of the property tax from power stations and the investment of the funds released.
53. The Mayor of Narvik at the time, Mr Olav Sigurd Alstad, has said in evidence that he does not think that at the time he fully understood the proposal. He does however acknowledge that at the Executive Committee questions were asked as to its legality. The paper before the Committee, as had the Haugesund paper likewise initially drafted by Mr Norberg, dealt with the legality of the transaction by reference to the Ministry Memorandum. The resolution was adopted unanimously.
54. The resolution imposed as a limitation on the placement (investment) side of the transaction that "the current worth shall be placed in accordance with the regulations adopted by the Municipality of Narvik governing financial management". Those regulations were last revised on 27 May 2004. Section 4.2.3 deals with the investment of long-term financial assets and provides, inter alia, as follows:

"(ii) Long-term financial assets may (besides bank deposits) be invested in the money markets, bonds or share funds including guaranteed investments/indexed bonds or loans.

(iii) The maximum investment in the money markets and bond funds is NOK 30 million."

55. On 24 August 2005 Terra, acting on behalf of Narvik, bought a CLN, Signum Fin 09/07/17, from SEB Merchant Banking at par for NOK 190 million for settlement on 15 September 2005. The structure of the CLN was similar to that bought by Haugesund. The issuer was Signum Finance III Plc, the bonds were Goldman Sachs Group Inc FRNs due 15 September 2017, the default swap counterparty was Goldman Sachs Capital Markets and there were 117 corporate credits as reference entities.
56. As at 31 August 2005 Narvik already had in place with Depfa an unutilised credit limit of NOK 100 million. On 31 August 2005 the Credit Committee was asked to increase this limit to NOK 190 million for a tenor of twelve years. On 1 September 2005 it did so, although the manner in which this limit was to be utilised remained a matter for Client Transaction Management and the Legal Department.
57. "As of 2 September 2005" Depfa and Narvik concluded an ISDA Master Agreement. Like that for Haugesund, it was to be treated as a single agreement with the swap and was governed by English law.
58. On 8 September 2005 Depfa and Narvik concluded a zero-coupon swap pursuant to which Depfa agreed to pay to Narvik NOK 190 million on 14 September 2005 and Narvik agreed to pay to Depfa the sums set out in Appendix 1 to the Confirmation. This involved quarterly payments of interest at three months NIBOR + 0.12% starting on 14 December 2005 and concluding on 14 September 2017. On 14 December 2017 there was to be the bullet repayment of NOK 190 million.
59. Narvik received NOK 190 million from Depfa on 14 September 2005 and paid that sum to Terra on 15 September 2005.
60. Mr Hestdahl said in evidence that he did not at the time realise that an investment of NOK 190 million in the CLN fell outside what was permitted by Narvik's Financial Regulations which would permit an investment of only NOK 30 million in this class of investment. Although this would seem to be a simple matter of arithmetic, Mr Hestdahl told me that he relied upon Mr Norberg who told him that the transaction was within Narvik's financial rules. This is an example of Mr Hestdahl giving no independent thought to the transaction. I am however satisfied that Mr Hestdahl fully appreciated that the sole purpose of the transaction was for Narvik to make a turn on the amount advanced by Depfa, by investing it at a greater risk than the risk which Depfa was accepting. Mr Hestdahl appreciated the equation between higher risk and higher return. He appreciated that the property tax expected to be received over the next twelve years was used as the calculation for the amount of the advance, but was otherwise irrelevant to the transaction. He appreciated that the risk being taken on the investment was Narvik's and Narvik's alone. He appreciated that if the investment proved unsuccessful, such that Narvik was not able to make the necessary repayments of the advance from it, then Narvik would have to make up any shortfall from its other assets. As with Haugesund, the liability to Depfa was recorded as such in the municipality's accounts.
61. The CLN in which Narvik had invested soon ran into trouble. Terra reported to Narvik on 12 June 2006 that two of the reference entities or credits had been downgraded to BB. They suggested that the CLN should be replaced with a CDO, which they said could be expected to give an overall return on the transaction of NOK 2 million as opposed to the NOK 1.368 million expected from the CLN, whose margin over the NIBOR + 0.12% payable to Depfa was 0.72%. Within three weeks a still higher return was forecast by Terra. The CDO was again presented as a superior instrument, offering a higher return, a reduction in expected losses and the advantage of flexibility through the ability of the manager or trustee to exchange reference entities in order to maintain the official rating of the bond.
62. Narvik accepted Terra's recommendation. On 7 July 2006 Terra sold the CLN at a loss of NOK 5.7 million. Terra arranged for the swap with Depfa to be amended in order to cover this shortfall, although Depfa was not told that this was the purpose of the amendment. In fact the request which came to Depfa was that Narvik should be permitted to pre-pay the loan/swap not at par but at around 98%/97% and then enter into a similar transaction incorporating Depfa's "loss" on the first advance. It appears that Depfa gave relatively little thought to this restructuring, although they took Norwegian legal advice as I recount hereafter. Depfa did not know that Narvik was seeking to finance a loss incurred on the CLN. Depfa did not know that their advance had been invested in a CLN. As Ms Fiona Sheil of the Client Transaction Management department put it "we were paying them out more money and increasing the margin". The upshot was an amended swap pursuant to which on 27 June 2006 Depfa advanced to Narvik a further NOK 5.7 million. However the quarterly interest rate was thereafter increased by 39.5 basis points to NIBOR + 0.515%, as I understand it the precise increase required in order to recover the additional NOK 5.7 million together with interest at the original rate over the remaining period during which interest and amortisation repayments were due. The bullet repayment of NOK 190 million was left unchanged. In reliance on advice from Terra to this effect, Mr Hestdahl believed this amendment to be within the scope of the original resolution of the municipality.
63. On 7 July 2006 Terra bought a CDO on Narvik's behalf for NOK 190 million. Narvik paid the difference of NOK 5.7 million to Terra on 11 July 2006. The CDO was Ocelot II, issued by Ocelot CDO 1 Plc.
64. The investment by Narvik in Ocelot II has proved to be disastrous. Like Haugesund's investment in Libretto, it was a wholly inappropriate investment, involving significant financial risk, contrary to section 52.3 of the Act. It was outside the terms of the original resolution of the municipality and in breach of Narvik's financial management regulations.
65. On 21 January 2008 the Chief Administrative Officer of Nordland, within which the municipality of Narvik lies, wrote to Narvik "annulling" the resolution pursuant to which the original swap had been agreed and directed Narvik to sell the CDO. The grounds upon which the Chief Administrative Officer made this determination require careful examination – see paragraphs 189 and 180 below. The CDO was sold on 13 March 2008 for 25.1%, i.e. at a loss of NOK 142,310,000 on the original investment of NOK 190 million.
66. On 20 June 2008 Messrs Lund & Co wrote to Depfa asserting that the swaps with Narvik were null and void. On 8 September 2008 the municipal council resolved that no further payments should be made to Depfa with the result that no payment was made on the next contractual payment date, 14 September 2008. By letters from Lund & Co dated 18 September and 13 October 2008 Narvik offered to pay to Depfa the net proceeds of the investments.
67. Thereafter Depfa terminated the amended swap with effect from 31 October 2008 on the grounds of failure to pay as pursuant to the terms thereof they were entitled to do. On 4 November 2008 Depfa informed Narvik that the amount payable was NOK 204,020,474.15 together with interest.
68. From the two advances of NOK 195,700,000 the net proceeds of the investments were NOK 47,690,000. In addition Narvik had paid to Depfa by way of interest under the original and amended swaps NOK 23,915,854.

Were the "swaps" loans?

69. The first of the central questions in this litigation is whether each of the swaps constituted a loan within the meaning of that word in the Norwegian 1992 Local Government Act. This is obviously a matter of Norwegian law. While it was suggested that the context of the Act requires a special meaning to be given to the word, it was not suggested that the word "loan" in the general Norwegian context bears a meaning different from that which would be attributed to it in the general English context. Nor was it suggested that the technique of statutory construction adopted by Norwegian lawyers is in principle any different from that adopted by English lawyers.
70. In agreement with the expert witnesses on Norwegian law who gave evidence for the municipalities and for Depfa, Professors Graver and Woxholth, I regard the answer to this question as overwhelmingly obvious. The agreements are plainly loans. Like Professors Graver and Woxholth, I regard the contrary view as simply untenable. I found it surprising that the expert witness who gave evidence on Norwegian law for Wikborg Rein, Professor Braathen, expressed such a contrary view. It was unsurprising that he was unable to put forward any coherent reason in support of it.
71. I should say a word about the three expert witnesses. Professor Hans Petter Graver is Dean of the Faculty of Law at the University of Oslo. He is primarily a public lawyer. Professor Geir Woxholth also has a chair at the University of Oslo. He is primarily a private lawyer, specialising in the fields of contract and company law. Professor Tore Braathen holds chairs in commercial law at the Norwegian School of Management BI in Oslo and in jurisprudence at the University of Tromso. He is primarily a company lawyer. In giving his evidence Professor Graver enjoyed the advantage of an impressive and enviable command of idiomatic English. Making due allowance for this advantage, I nonetheless derived the most assistance from Professor Graver, whose principal field of endeavour probably equipped him best of the three expert witnesses to analyse the question of capacity on which there was most controversy. His evidence was measured and thoughtful. Although I did not ultimately adopt all of his views, some of which at times I found difficult to follow, I would nonetheless pay tribute to the contribution of Professor Woxholth. He was criticised by Mr Milligan for what Mr Milligan characterised as "excited partisanship". It is true that Professor Woxholth gave his evidence with enthusiasm. I do not consider that he was consciously partisan. I think that he saw the exercise in terms of a vigorous academic debate, which is not inappropriate. He was I am sure at all times trying to assist me to understand the issues and to reach a principled and correct answer.
72. On the question whether the "swaps" were loans, it is difficult to quarrel with the approach of the Ministry of Justice that a loan connotes that one acquires the right to borrow or use something in exchange for accepting an obligation to return at a later date that which is borrowed. Given that the agreement between the municipalities and Depfa is by common consent to be found, and to be found exclusively, in the three documents comprising the ISDA Master Agreement, the Schedule to it and the Trade Confirmation, even Professor Braathen agreed that the agreement, looked at in isolation, is a loan within the meaning of section 50.
73. I would agree that context is usually important. However an agreement may contain or lack features the presence or absence of which mean that the context is unlikely to alter the proper characterisation of the agreement. Thus this agreement (both are the same) has no provision within it as to how the sum advanced or the proceeds is or are to be used or applied. That is exclusively for the municipality to decide without reference to the interests of Depfa. There is no provision as to the source of funds to be used for repayment, whether of principal or interest, which again is a matter exclusively for the municipalities to decide, without reference to the interests of Depfa. There is not even expressed an expectation as to any identifiable assets or revenue stream from or out of which repayment is expected to be made. Depfa is given no security over any assets or revenue streams. Given these features, it is difficult to see how the context in which the agreements were made can alter their basic character.
74. In his oral evidence Professor Braathen identified four features of the transaction which in his view prevented it from having the characteristics of a loan. These were:

i) by its resolution the municipality committed itself to invest the money advanced in a specific investment;

ii) the period of the investment corresponded with the period over which the advance would be enjoyed, i.e. they shared a common maturity date;

iii) the proceeds of the investment were expected and intended to be sufficient to enable the advance to be repaid therefrom, and

iv) the investment was of a low risk nature.

75. None of these considerations, even if made out, and in my view the fourth is not, can conceivably affect the proper characterisation of the agreement between the municipalities and Depfa. As against Depfa the municipalities had complete freedom to deal with the sums advanced as they chose. It was their obligation to repay the advance (and to pay interest thereon) out of their resources, irrespective of the performance of any particular investment. There was simply no connection between the advance and the manner in which it was to be used and the manner in which it was to be repaid. None of the four features identified by Professor Braathen were in fact incidents of the agreement made between the municipalities and Depfa. They cannot therefore affect its proper characterisation.
76. In opening Mr Mitchell submitted that the swap agreements form part of transactions that in economic terms were not loans, but in each case were part of a restructuring arrangement whereby the kommunes received the capitalised net present value of an income stream in exchange for a serious of periodic payments. In closing he put it slightly differently. The transaction is not so much a borrowing of a capital sum for investment as a notional sale of future income so as to realise its current value.
77. The Ministry of Justice in its letter of 28 January 2008 pointed out that it could only be possible to characterise transactions such as these as anything but a loan if the obligation to repay was conditional on receipt of the expected future income stream which had been notionally capitalised or sold or conditional on the successful outcome of the investment made with the proceeds. Neither of Mr Mitchell's formulations can mask the failure of the swap transactions to exhibit either of the critical features. The expected income stream served as no more than the basis of the calculation of the amount to be advanced. The expected income stream was not sold to Depfa – Depfa had no interest in the income stream. Nothing was restructured. The municipalities simply borrowed a sum the calculation of which was based on the net present value of certain revenues it hoped and expected to continue to receive. Repayment was in no way conditional upon the performance of the investment. Properly understood, the municipalities were simply borrowing money in order to invest it in the financial markets. Professor Braathen agreed that this was something which they were not permitted to do. He put forward no comprehensible reason for his view that this was not in fact what the municipalities were doing.

Was Wikborg Rein's advice negligent?

78. In these circumstances I propose next to resolve the question whether in reaching the view that the transactions were not loans within the meaning of the Act, Mr Rasmussen of Wikborg Rein reached a view which no reasonable Norwegian lawyer could have reached. Mr Mitchell naturally prayed in aid in this regard that a Norwegian professor of law, i.e. Professor Braathen, still takes the view that Mr Rasmussen was correct, and that the view of the Ministry of Justice is driven by "political" considerations in the aftermath of the municipalities losing money in reliance on Terra's advice. This is I am afraid muddled thinking. The reasoning of the Ministry of Justice is in my view wholly unassailable. It is the earlier reasoning of the Ministry of Local Government which is patently unsound and which might possibly have been influenced by pragmatic considerations, or as Wikborg Rein themselves put it, "purpose oriented" – see paragraph 99 below.
79. Mr Rasmussen must be judged in the light of the standards reasonably to be expected of a Norwegian lawyer professing expertise in the field. It is not suggested that those standards are in principle any different from those reasonably to be expected of an English lawyer, although obviously the evaluation must take account of the different Norwegian background.
80. That background begins with an advice written for Terra on 14 June 2002 by Messrs Wiersholm Mellbye & Bech, lawyers practising in Oslo. The relevant letter of advice was written by Mr Conradi Andersen, to whom I have already referred as the author of the Bjerknes letter in the following year. Mr Andersen moved from one practice to the other. The Wiersholm letter is headed "Financial Sale of Concession Power – Position Regarding Municipalities' Taking Up Of Loans". Relevant sections include:

"I refer to the approach regarding the above whereby we were requested to make an assessment of whether financial transactions carried out by municipalities in connection with the sale of concession power, are to be regarded as taking up loans.

In the following I will provide a short description of the transaction before then giving an overview of the relevant provisions for the municipalities and, finally, an assessment of whether the transaction is to be regarded as a loan in relation to current regulations.

My conclusion is that there is no basis for regarding the transaction as a loan.

…

In respect of allocated concessions for hydro-electric plants the municipalities receive concession power. …

The municipality is free to choose the form of sale for the concession power. …

Upon sale in accordance with long-term agreements the municipality will have the opportunity to agree advance payment in accordance with a determined power price, ongoing payment etc. Upon advance payment the municipality will, for example, be able to receive the current value of all payment during the term of the contract. The current value of an agreed cash-flow may be affected by the creditworthiness of whoever is to pay. If the payer has high creditworthiness, the cash-flow will be perceived as being more secure and more valuable than if the payer is assessed more weakly. Normally a municipality will be regarded as a payer with higher creditworthiness than, for example, a private company.

It is this difference that is seen as the central element in the transaction now being considered. By selling the cash-flow from the power agreement, the municipalities achieve a higher credit assessment when this is regarded as coming from the municipality than if it is perceived to come from the power purchaser in the long-term agreement. The higher value (additional value) will be received by the municipalities through the transaction.

Through the transaction the municipalities receive a payment of the current value on the future cash-flow from the power agreement, based on the cash-flow coming from the municipality. In return, the one who pays out receives the current value of the income from the power agreement. The municipality must not then itself allocate funds for these payments to the one who paid out the current value.

…

The outline transaction can have certain aspects in common with a loan. The municipality receives a one-off amount from an administrator (preferably a bank) and ensures that a cash-flow thereafter goes to the administrator. All similarity ends here. …

The financial reality is, it is true, that the municipality receives a one-off payment for the cash-flow from a power agreement and that parts of this one-off sum are paid back through the income flow from the power contract. Viewed thus, the position has some points of similarity with a loan situation. The reality is, however, that the municipality is paid a current value of the cash-flow that will come in through the power agreement concluded by the municipality. This is comparable with the municipality having received advanced payment for the power agreement. In addition to the advance payment the municipality's financial position (credit rating) leads to the one-off amount paid out by the administrator being somewhat higher than if the amount had come from a one-off payment to the municipality from the counterparty in the power agreement. …

The transaction in our case does not mean that there will be any uncovered repayment obligation that can affect future service provision or involve a burden for future generations. …

Since the cash-flow to the administrator comes directly from the power contract, there is little danger that the municipality must pay anything at all. It is then not natural to say that the transaction is an agreement that can subject the municipality to expenses. …

On the basis of the above it is my opinion that the outlined transaction cannot be regarded as a loan, neither in reality nor in relation to the Municipalities Act's provisions."

81. I do not have the details of the transaction which was there under consideration. It is plain however that in the Haugesund and Narvik transactions which I have to consider it cannot be said that the cash flow to the bank "comes directly" from either the income from Haugaland Kraft or the property taxes receivable by Narvik. It could not properly be said that Haugesund and Narvik had "sold" their entitlement to these two sources of revenue.
82. Professor Braathen pointed out that the Ministry of Local Government was familiar with Messrs Wiersholm's advice when it came to write the Vik letter, the contents of which I have already set out at paragraph 12 above. A copy of the Wiersholm letter was appended to the letter of 25 June 2002 from the County Governor of Sogn which elicited the Ministry's views on the Vik transaction. Professor Braathen thought that the Ministry probably based its views in part upon the reasoning in the Wiersholm letter. There is certainly some consonance between the two letters.
83. I have already pointed out that, just as I have no details of the transaction on which Wiersholm were asked to advise, so too I have no details of the Vik transaction. However a respected Norwegian commentator, Professor Bernt, writing in Norsk Lovkommentar 2008 at Note 670, treats the Vik transaction as a case where there was an intention to repay the loan out of the ongoing licensing fees, the commitment being to pay back NOK 9.75 million for ten years. It is not apparent that the repayment was in fact conditional upon receipt of the licensing fees, and if it was not the Ministry was simply incorrect to speak of there being no "uncovered future payment obligation". In the cases which I have to consider there was not even an intention on the part of the municipalities to repay the advance out of the expected income streams from whose net present value the advance was calculated, although as I have already explained even if there had been that could hardly transform what is self-evidently a loan into some different type of transaction. One could not say of either the Haugesund or the Narvik swap transactions that they bound future revenues against one-time payment. Both involved an uncovered future payment obligation. Both interest and repayments of principal might have to be met out of revenues which otherwise could have been used by the municipalities to provide services to their citizens.
84. The Bjerknes opinion I have already set out at paragraph 13 above. Unsurprisingly given the common authorship it echoes the Wiersholm letter and prays in aid the subsequent Ministry acceptance of the reasoning contained therein as is apparent from the Vik letter.
85. Next in time comes the Ministry Circular, the relevant part of which I set out at paragraph 14 above. Standing alone, the Circular is an inadequate summary of the Vik letter as it makes no mention of either the method or the amount of repayment. Indeed it makes no reference to the repayment obligation at all. Furthermore in its second paragraph it gives three reasons for the Ministry's conclusion which on analysis prove to be three different formulations of the same point. "The balance requirement" is, according to Professor Graver, as I have already explained at paragraph 14 above, the balance between income and spending. Professor Braathen explained the references to "the financial liability principle" and "a stable level of activity". The first he said meant that those who share the benefit should bear the cost. The second means that the level of activities should be equivalent to the income, i.e. that a municipality should not increase its level of activity by borrowing. It seems to me that essentially all three of these concepts amount to the same thing. Once it is accepted that the obligation to repay is independent of the continued availability of the notionally capitalised cash flow it is obvious that the mandatory principle is not observed.
86. On 11 March 2004 the Ministry of Local Government had occasion to advise the municipality of Oppdal on a proposed method of purchasing the privately held shares in AS Oppdal Electricity Works. The municipality enjoyed the right to withdraw a certain amount of electricity from Driva power station, a right which I assume to amount to the right to purchase electricity at a concessionary price. One proposed method involved a newly created company which would be funded by a financial institution, in return for which the financial institution would be given "a claim on the revenues of the municipality from the withdrawal right for a certain number of years. The time framework will be determined specifically by the number of years which at a given interest-rate produce a current value equivalent to the cash amount". The Department said that it did not regard this type of transaction as being in line with the intention of the Act. It was it said "pretty much the same" as borrowing. It compared it with the transaction dealt with in the Vik letter. It is I think a fair inference that the Vik transaction was at all times regarded by the Department, rightly or wrongly, as one in which the bank received an interest in the licence fees, as indicated by its description of the agreement as the "financial sale of hydro power licence", echoing the Wiersholm description of "financial sale of concession power". Having deprecated transactions of this type as inconsistent with the intention of the Act, the Ministry nonetheless advised Oppdal that until it had carried out the evaluation announced in the Vik letter of whether it might be necessary to prohibit the use of such agreements, their use would not be subject to a prohibition.
87. It was against this background that Wikborg Rein was instructed to advise Depfa in May 2004. In cross-examination Mr Mitchell was critical of Mr Pheifer for not sending to Wikborg Rein a copy of the Vik letter, the Bjerknes letter, the Ministry Circular and Mr O'Sullivan's memorandum. As it happens Mr Pheifer was unaware that Depfa had the Ministry Circular, although it had by now found its way to his department. He had not I think read the Bjerknes letter, although he had read Mr O'Sullivan's memorandum which referred to it. I can well understand why it did not occur to Mr Pheifer to send any of these documents to Wikborg Rein. He told Mr Rasmussen what were his concerns. On 14 June he e-mailed Mr Rasmussen as follows:

"I understand that there are restrictions on Munis entering into loan agreements and that they have decided to structure this deal under an ISDA Master Agreement as a one-off deal. Commercially it will take on the characteristics of a loan with an up-front payment by Depfa and thereafter a series of payments to be made by the Muni over the life of the asset.

I am keen to obtain the opinion to ensure that there is no prohibition on the Muni from entering into Swap Agreements, to receive comfort that it has been properly executed, is within their power and authority and legally valid and enforceable."

Mr Pheifer did not wish to give the impression to Mr Rasmussen that he wanted one view as opposed to another. He wanted Wikborg Rein to come to their own conclusions. It might have been helpful to have sent copies of the Vik letter and the Ministry Circular, and Mr Rasmussen might have been interested to see the Bjerknes letter, although as is now known it might have given what is almost certainly the false impression that the Ministry and Messrs Bjerknes had independently come to the same view. It is however hardly a matter for criticism that Mr Pheifer did not think it appropriate to send these materials to Mr Rasmussen and indeed it might be said that so to do would have amounted to giving Mr Rasmussen a steer. It was not the practice of Depfa to send copies of their own internal analysis to external lawyers. Mr O'Sullivan's memorandum was perceptive but hardly profound. It would I think have been surprising if it had been sent to Mr Rasmussen.

88. The initial instructions to Wikborg Rein were contained in an e-mail of 11 May 2004 in these terms:

"We are bidding to enter into ISDA Master Agreements with some Norwegian Municipalities. If we are successful we will require a legal opinion to be satisfied that the Muni has the power, authority and capacity to enter into the agreement and to cover off the normal matters addressed in such legal opinion: i.e. that it has done everything required by it in order to ensure that the agreement is enforceable, that it is enforceable, obligations ranking pari passu with other unsecured debt obligations, choice of English law enforceable, no WHT applicable/indemnity in ISDA enforceable etc.

We would also like you to check the relevant authorisation documentation (rather than make any assumptions in this regard).

For your information I attach the termsheet and a draft ISDA Schedule.

Please would you confirm that you would be willing to undertake this work and give us an estimation of your fees for providing a legal opinion in each case. Please note in the first instance there are two Munis we have made an offer to and they are Karmoy and Haugesund."

With that e-mail were enclosed the draft offer letter to Haugesund (and Karmoy) which offered "financing in the form of annuity swaps (each the Loan)", together with the draft ISDA Schedule. Mr Rasmussen was puzzled by the reference to a loan, which prompted an enquiry to Mr Pheifer and Mr Pheifer's reply of 14 June 2004 the contents of which I have set out above. By the time he advised Mr Rasmussen had copies of the final drafts of all of the elements of the contractual documentation, certified copies of the relevant resolution by Haugesund, the supporting paper for it prepared by Ms Lothe and Haugesund's delegation rules. It is worth recording that Mr Rasmussen did not suggest that he lacked any document or other materials which was or were necessary to enable him to form a proper view.

89. Mr Rasmussen qualified as a lawyer in 1990. He worked for two years as a lawyer in local government. Thereafter he worked for five years as an in-house lawyer in a Norwegian bank. In that capacity he dealt with lending to municipalities and became aware of the statutory restrictions. He also worked on ISDA agreements and associated transactions. He joined Messrs Wikborg Rein as an Associate in 1997, becoming a Senior Associate in 1999 and a Partner in 2003. He has at all times worked with the firm's Banking and Finance Group.
90. Mr Rasmussen extracted the Ministry Circular H-15/03 from the Ministry website. He also looked at two commentaries on the 1992 Act, in which he found nothing of any relevance, as indeed he found nothing of any relevance in his own file of materials. He discussed the matter with a public lawyer in the firm, Mr Ole Haugen, who was he said "not much help", in fairness because he had never before looked at the point. Ironically he had occasion so to do only a few months later, as I describe below.
91. Mr Rasmussen placed great reliance on the view of the Ministry as set out in the Circular. He regarded an interpretation of the statute published in this manner as "a very strong source of law". He described his process of reasoning in this way:

"… I formed my own view in relation to the – I mean, when you do an interpretation of an Act like this, you have to look at the sources of law, and this was the source of law and looked as though the Ministry had considered this in a careful and appropriate manner, and I therefore agreed with the view of the Ministry on the basis of this only source of law there was."

92. Mr Rasmussen was naturally asked whether he gave any independent thought to the question whether the Ministry was correct in its view. It was pointed out to him that the Circular identifies no substantive reason for the conclusion that a swap such as he was considering is not to be equated with a loan. He was unable now to point to any reason which justified that conclusion, other than that that was the conclusion to which the Ministry had come, and he agreed that it was probable that at the time he had had no such independent reason either.
93. Mr Rasmussen was not in my view entitled to regard the Ministry's interpretation as a very strong source of law. It was not in the strict sense a source of law at all. As Professor Graver pointed out, "the Ministry has no legal power to change the law or to issue decisions on what constitutes a loan. Legally speaking, [the] statement by the Ministry is therefore just a legal opinion which has no authority in Norwegian law apart from the quality of the opinion thus expressed". This passage from Professor Graver's expert's report for the trial was in fact directed to the Vik letter, but no-one has suggested that the Circular enjoys any greater authority. In fact the reasoning contained in the Circular is so exiguous that it is difficult to ascribe any real weight to the view expressed therein. It is clear from the evidence that in Norway legal opinions issued by the Legal Department of the Ministry of Justice are accorded special weight, although not the status of a source of law, out of deference to the quality of the lawyers who habitually work there. The same is however not true of opinions emanating from the Ministry of Local Government.
94. Against this background it was plainly the duty of Mr Rasmussen to address the question whether the Ministry was correct in its view. Moreover he readily recognised that he had a duty to advise Depfa of any material doubt as to the correctness of the Ministry's view.
95. Although they would have taken some time to obtain, Mr Rasmussen could have asked the Ministry for the papers relating to Case 02/4393 which was the heading to the relevant section of the Ministry Circular and is in fact the reference given by the Ministry on the Vik letter. As it happens that is exactly what Mr Rasmussen's partner Mr Haugen did later in 2004 when, coincidentally, he was asked by Terra to advise on a similar proposed transaction concerning municipalities' revenues from water and sewerage fees. Had Mr Rasmussen done so he would have obtained the Vik letter.
96. However that may be, and possibly because he saw nothing except the Ministry Circular, Mr Rasmussen did not think that the Ministry had approached the matter on the basis of an exchange of a lump sum against a revenue stream. Indeed his subsequent approach to the Narvik amendment demonstrates that it was irrelevant to his thinking that the amount of the advance might equate to the discounted value of an anticipated revenue stream. Whilst the analysis in terms of an exchange of a lump sum against a revenue stream is itself untenable for the reasons I have given, the fact that Mr Rasmussen did not embrace it makes it the more difficult to understand how he can have come to the conclusion which he did. I am, I am afraid, driven to the conclusion that he simply relied upon the Ministry Circular, without giving the matter any real independent thought. That is in fact to all intents and purposes what his e-mail of 17 June 2004 to Mr Pheifer said:

"We have considered whether the transaction would qualify as a loan under the Norwegian Municipality Act. Based on a circular from the Norwegian Ministry on Municipalities, the transaction is in our opinion not a loan under such Act."

This was not the manner in which a reasonably competent Norwegian lawyer should have proceeded. In consequence Mr Rasmussen reached a conclusion which no reasonably competent Norwegian lawyer exercising proper care could have reached. I am conscious in forming that view that it applies equally to Professor Braathen. It is not a conclusion which I reach lightly. It is however inescapable. Neither Mr Rasmussen nor Professor Braathen could give any coherent justification for the view that an agreement such as that entered into by Haugesund and Narvik with Depfa cannot be equated with a loan as that term is used in the Norwegian Local Government Act.

97. I mentioned above that only three months later Wikborg Rein in the shape of, amongst others, Mr Haugen, was asked to advise Terra in relation to a similar transaction, this time involving water and sewerage fees. Not unnaturally in view of their past, inconclusive, discussion, Mr Haugen, a fellow partner of Wikborg Rein, ran the matter past Mr Rasmussen. Time records reveal that Mr Haugen, accompanied by an associate Mr Hauge, spent forty-five minutes discussing the matter with Mr Rasmussen on 13 September 2004. During the course of the discussion Mr Rasmussen explained his understanding of the Ministry Circular in the context of the Haugesund transaction. It is Mr Rasmussen's recollection that he and Mr Haugen agreed that the considerations were different in relation to water and sewerage fees as opposed to those which obtained in relation to the Haugaland Kraft dividend and interest payments, since there are statutory restrictions on the municipalities' application of the former funds whereas there is no restriction on the application of dividend and interest income. It is Mr Rasmussen's recollection that neither Mr Haugen nor Mr Hauge expressed any doubt either as to the conclusion which he had reached as regards the Haugesund transaction or as to the correctness of the view expressed in the Ministry Circular.
98. For present purposes it does not really matter whether Mr Rasmussen's recollection is accurate, and since this is not in issue I have not of course heard evidence from Mr Haugen. It is accepted that Mr Rasmussen had no further involvement in Mr Haugen and Mr Hauge's work, and that he was not told of the outcome thereof, and in particular was not shown the advice given to Terra. Indeed it is obvious that if he had been shown that advice he would have been likely at the very least to qualify his subsequent advice given to Depfa in relation to further transactions. However I should record that his recollection is not easy to reconcile with either the probabilities or the documentary evidence. As to the former, as I have already noted it was not Mr Rasmussen's approach that the transactions in question amounted to the exchange of a lump sum against an anticipated revenue stream. He was well aware that there was no intention that the future income stream should become in any way impressed with an obligation of repayment. The counterparty financial institution was not intended to and would not obtain any interest in or over the future revenues. In those circumstances restrictions on the use of any particular source of revenue would be irrelevant to the legality of the transaction. As to the documentary evidence, only three days after this discussion took place Mr Haugen generated an internal note to another Wikborg Rein partner, Mr Kjornaes. In it he recounted that he and Mr Hauge had had a discussion that evening, 16 September, and that both he and Mr Hauge had been "initially sceptical about the Department's interpretation of the legal aspects of the zero coupon swaps". They regarded the Ministry Circular as not in all respects clear, but left to their own devices Mr Haugen and Mr Hauge thought that the transactions amounted to a form of fixed interest loan which was prohibited by section 50. It is of course possible that this view represented a development in their thinking since discussing the matter with Mr Rasmussen, but the note does not suggest that either Mr Haugen or Mr Hauge had ever been in any real doubt. It is for present purposes telling that Mr Haugen and Mr Hauge concluded that, in order to determine "how the Department has read here" it was necessary to obtain the case papers from the Department. They proceeded so to do, notwithstanding that this inevitably, as they noted, would delay their advice. On the same day Mr Hauge sent a report to Terra, explaining the need to examine the matter in greater detail and pointing out the respects in which the Ministry Circular was unclear.
99. As a result of their request Mr Haugen and Mr Hauge obtained from the Ministry the Vik letter and the correspondence which had generated it. In October 2004 they prepared a memorandum of advice for Terra which they passed in draft to their colleague Mr Kjornaes with the covering note "Here at last is our input, from Tor Henrik (Mr Hauge) and myself, after a great deal of hard thinking, possibly due mostly to our disagreement with the Ministry in its interpretation of the Local Government Act". The advice was detailed and carefully considered. Reference was made to the Vik letter and to the Ministry Circular. An enquiry had been made of the Ministry. A Mr Bent Devik informed Wikborg Rein that the findings of the Ministry "still apply". Thus Mr Haugen and Mr Hauge concluded that "in regard to financial sale of licensed energy fees, operators will be able to refer to the Ministry's statement and memorandum without anticipating objections from auditors and other control organs". Nonetheless Mr Haugen and Mr Hauge continued:

"However, in the statement, the Ministry expresses a certain scepticism towards this type of transaction and there is thus some risk that an extension of this concept to other types of revenue will possibly lead to an alternative evaluation by the Ministry. This risk is reinforced by, in our assessment, the fact that the Ministry's statement is not fully substantiated. For this reason, in the following we will add certain comments to the Ministry's statement. …

According to our perception, there is reason to question the understanding of the law that is expressed in the Ministry's statement. The principle for the evaluation is that the concept of a 'loan' in the Local Government Act must be given the same meaning that the word has in common language use. In consideration of the content of the agreement – that the Ministry states 'has the same economic realities as a loan' – it is thus, as we understand it, obvious to apply as a basis that the transaction appears to be a loan.

When the Ministry nevertheless ends up at the opposite conclusion, this is, we believe, an purpose-oriented interpretation. Our view, however, is that the Ministry's brief basis does not appear to be unconditionally convincing. The decisive issue for the Ministry is that the agreement – in contrast to a loan – according to the Ministry's view, does not involve any uncovered payment obligations in the future that may have consequences for the level of service to its citizens.

The Ministry does not substantiate its evaluation of this point any further. The statement can, however, be understood such that if the premises for the transaction are present, including that no losses occur in the bond portfolio, the municipality will have achieved an increase on returns on the underlying cash flow, and at the same time the municipality's repayment of the non-interest bearing bond swap in its entirety will be able to be financed when the bond portfolio matures. In this way, the transaction is distinct from a loan for consumption purposes, in which excessive consumption in relation to income in one year can easily lead to consequences in regard to the provision of public services in another year.

One problem, however, is that the same reasoning could have been applied to an ordinary loan in order to purchase bonds; but this type of loan is prohibited according to the Local Government Act. The Local Government Act section 50 number 1 restricts the ability to take up loans for investment purposes to investments in buildings, construction projects and property plant and equipment for the municipality's own use.

Further, there is concern about the Ministry's reasoning that the premise that there shall be no uncovered payment obligations, is that no losses are incurred from the bond portfolio. The entire possibility of increased returns in the transaction rests, however, on the municipality – through investment of the current value in the bond market – accepting a higher credit risk than that of the municipality's financial counterparty in the non-interest bearing bond swap. At the same time, there is no connection between the municipality's obligation to repay the non-interest bearing bond swap and the risks involved in the investments. If losses occur on the investments, the municipality's payment obligation remains in full. Thus, it is in the nature of the matter that there is a risk of losses on the investments, and should this risk come to pass, an uncovered payment obligation will exist that must be covered in another way, with possible subsequent consequences for the level of public services.

…

Finally, the Ministry's brief basis for its perception of the law does not appear entirely convincing. This begs the question as to whether the Ministry's statement is based on a full and complete understanding of the risks involved in the transaction, for the municipality."

Mr Haugen and Mr Hauge concluded by recommending that Terra run the matter past the Ministry before offering the product to their clients. It seems that Mr Haugen subsequently thought better of this advice, in view of the risk of an enquiry of this nature causing the Ministry to go back upon what it had already said. Mr Haugen thought that this was advice which "it [was] probably best not to put down in writing".

100. One can be critical even of the substantive advice given by Mr Haugen and Mr Hauge to Terra in November 2004, which was I think when the advice ultimately reached them. They should in my view have pointed out that the view of the Ministry enjoyed no special legal status, although that point was possibly of less importance to Terra and their domestic Norwegian clients than it was to banks such as Depfa. For Depfa it would have been small comfort to be told that no objection could be anticipated from "auditors and other control organs". They needed to know whether the municipalities had capacity to enter into the transaction. If they did not, then irrespective of the attitude of auditors or of the Ministry the bank ran the risk of there occurring precisely what has happened here, the municipalities sheltering behind their lack of capacity in an effort to avoid the obligation undertaken. But the approach of Mr Haugen and Mr Hauge does point up the kind of analysis to which the point should have been subjected by Mr Rasmussen. It also gives the lie to the argument that Wikborg Rein were at times inclined to advance, to the effect that in advising as he did Mr Rasmussen was merely giving effect to the received legal wisdom in Norway as to the legality of municipalities entering into zero coupon swaps with a view to investing the proceeds in search of a higher return than their interest liability and future income foregone. There was no such general view. If it was thought that the Ministry or official auditors might raise no objection to such transactions that is a different point, wholly irrelevant to the duty to advise a bank such as Depfa whether a municipality had the capacity to enter into the transaction.
101. By the end of the hearing I did not understand Mr Mitchell to be pursuing an argument based on a Canadian decision, Ormindale Holdings [1982] BCL No. 1899, to the effect that Mr Rasmussen was under no duty to qualify his advice by reference to the degree of confidence with which he held his view. Mr Rasmussen himself accepted that, had he thought that any material doubt attached to his view, he would have advised Depfa of it, probably by e-mail rather than in the formal opinion letter. This was realistic. However the argument, if pursued, does not in my view begin to get off the ground. The Ministry view might lead to a degree of confidence that the transaction would not be impugned by the county auditors or by the Ministry itself. However the Ministry view was so patently without support in legal reasoning that Mr Rasmussen could not reasonably accept it as representing the law of Norway. He was plainly under a duty to advise Depfa that whatever the view of the Ministry might be there existed at the very least a real risk that a municipality could itself, if things went wrong, rely upon its own lack of capacity to contract in order to escape liability. I have not of course as yet set out my conclusion on capacity. However the starting point of that enquiry is whether the transaction was a prohibited loan. It was not Mr Rasmussen's advice that even if the loan was prohibited this had no impact on the capacity of a municipality to enter into it. In the light of his view on the nature of the transaction and the interpretation of the Act, this question did not arise. I doubt if it occurred to Mr Rasmussen that, even if the transaction was a prohibited loan, it might be arguable that the municipality nonetheless had the capacity to enter into it. As appears hereafter, Norwegian law does not approach these questions in the same way as does English law, and Mr Rasmussen is not necessarily to be criticised if he did not address this question, notwithstanding his instructions asked him about capacity. Mr Rasmussen clearly, and rightly, approached the matter on the basis that the critical question was whether the transaction was a loan. He appreciated that he was under a duty to advise Depfa if there was any material doubt on that score. He would readily have appreciated that, if the transaction was indeed a prohibited loan, that would give to the municipality the opportunity to argue that it was not bound by it. For the reasons which I have already set out, at the very least Mr Rasmussen should in my view have advised that the transaction was a prohibited loan, so that Depfa could decide for itself whether it wished to run the risk that the municipality could or would in due course seek to suggest that it was not bound thereby.
102. Mr Rasmussen's opinion of 8 September 2005 in relation to the Narvik transaction was in the same form as his earlier advice, save only that as from November 2004 he had modified the form by including in the recital of documents examined a reference to the Ministry Circular H-15/03. Mr Rasmussen on this occasion again checked the relevant sources of law, including his personal files, to see if there had been any legal developments in relation to section 50. There had not. Mr Rasmussen also says that he noted that there were no restrictions on the application by Narvik of its income from property taxes on power generating plants, and in his first Witness Statement he stated that he noted that the characteristics of the swap were the same in both cases, Haugesund and Narvik, in that the municipality would be swapping a future revenue stream against payment up-front of a lump sum. At trial Mr Rasmussen disavowed this latter description of the transactions as "loose terminology". In the light thereof I again question the relevance of the lack of restrictions on the application of the revenue stream but I need not dwell on the point. It suffices to say that Wikborg Rein was again in breach of duty in tendering to Depfa the advice it did in relation to the Narvik transaction.
103. In the light of this conclusion it may be unnecessary in this context to give separate consideration to the advice given in relation to the Narvik amendment, although it will be necessary for me to consider it hereafter in the context of Wikborg Rein's challenge to the allegation that Depfa relied upon its advice. In brief, Mr Rasmussen was told on 26 June 2006 that "Depfa has entered into a restructure of an existing transaction with Narvik" and that Depfa would like him to review the conditions precedent to confirm the capacity and authority of Narvik to enter into the amendment of the existing transaction and to provide Depfa with a legal memorandum confirming that the necessary conditions precedent had been reviewed by Wikborg Rein. Having been sent the Amended Trade Confirmation, Mr Rasmussen noted that a further fixed amount of NOK 5.7 million had been advanced on 27 June 2006 and that the margin had increased considerably from 12 basis points to 51.5 basis points. He asked what was the purpose of and commercial reasoning behind the amendments. The explanation which he received from Depfa was that "we agreed with Narvik that they could restructure the deal so they received an up-front amount of NOK 5.7 million on 27 June 2006 and the cost of taking this additional up-front amount is reflected in the increased margin for Depfa". Mr Rasmussen was also sent a copy of the Mayor's signed Confirmation that the restructure of the existing transaction was within the City Council's decision of 30 June 2005 "and associated to the entering of 0-coupon swap". Mr Rasmussen advised by e-mail of 12 July 2006 that "the amendment of the original trade confirmation dated 8 September 2005 set out in the Amended Trade Confirmation does not conflict with the Resolutions set out in the Minutes [of the meeting of the municipal council of Narvik dated 30 June 2005]".
104. Mr Rasmussen was asked at trial on what basis he had concluded that the new advance of NOK 5.7 million and the agreement for its repayment fell outside section 50 of the Act. By the original resolution of 30 June 2005 Narvik resolved to restructure the property tax deriving from electricity generating stations in the municipality over the next twelve years and to invest the current value. The resolution did not say that the current value was NOK 190 million, although Mr Rasmussen knew from the original trade confirmation that that had been the amount of the original advance. At trial Mr Rasmussen had no real recollection whether when he was asked to consider the amendment he had given any consideration to the question how the sum of NOK 5.7 million related to the current value of the income stream. At one point in his evidence he did say that his reasoning was that the amount could well have been NOK 195.7 million at the outset. However he also said that he proceeded in 2006 on the basis that as at the date of the transaction in 2005 the current value of the relevant income stream might or might not have been NOK 195.7 million.
105. I think it unlikely that Mr Rasmussen gave any real thought in 2006 to the question whether a further advance of NOK 5.7 million could fall outside section 50, but if he did it was plainly irrelevant to his conclusion whether the NOK 5.7 million did in fact relate to the discounted value of the anticipated revenue stream. I think that Mr Rasmussen simply saw what he was being asked about as an amendment to an existing swap which he had already concluded did fall outside section 50, without the need to consider anew the question whether section 50 presented an obstacle in the altered circumstances. However there is simply no basis upon which he could reliably have concluded even that the amended transaction fell within the class which had apparently received the imprimatur of the Ministry. I think it likely that the only question which Mr Rasmussen did address, apart from the authority of the Mayor to sign the Amended Trade Confirmation, was whether or not the amendment fell within the terms of the original resolution. A proper consideration of this question did of course involve an enquiry into the relationship between the sum of NOK 5.7 million and the 2005 discounted value of the anticipated twelve-year revenue stream. On the question whether or not the amendment fell within the terms of the original resolution Mr Rasmussen's reasoning appears to have been that the new amount represented only a relatively small increase in the original amount taken up. This was an obviously inadequate approach. On this point Mr Rasmussen needed to be satisfied that the further advance of NOK 5.7 million represented the product of calculations based on the net present value in 2005 of the then current level of property taxes and a trend projection for the coming years. The resolution did not authorise ad hoc increases in the amount of the advance which Narvik could accept from the financial institution.
106. Wikborg Rein was in breach of duty in failing to advise that Narvik lacked the capacity to enter into the Amended Trade Confirmation because of the impact of section 50, just as Wikborg Rein had negligently given positive advice in relation to the original transaction. It may add nothing, but in my view Wikborg Rein was independently and additionally negligent in advising that "the Amended Trade Confirmation does not conflict with the resolution" of 30 June 2005.

Did the municipalities have capacity to enter into the "swaps" with Depfa?

107. It is common ground that under the English conflict rule, the question whether the kommunes had the capacity to enter into the contracts with Depfa is governed by the law by which the kommunes are constituted, here Norwegian law. See Dicey, Morris & Collins, The Conflict of Laws, 14^th Edition, Rule 162.
108. It is also common ground between the three experts in Norwegian law 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 – see their joint statement at paragraph 11.
109. Mr Milligan submits that it is common ground that if the swaps were loans, then the municipalities did lack substantive power to conclude them. This was not in fact common ground since Wikborg Rein did not accept it as correct. Even if it were common ground, Mr Mitchell would still contend that that is not conclusive of the critical question whether the kommunes lacked capacity to enter into the contracts. Both Mr Milligan and Mr Railton treated a formal limitation on a substantive power as necessarily going to capacity. However Mr Mitchell submits that it cannot be assumed that the Norwegian concept of lack of substantive power is the equivalent of the English concept of capacity. I have found this question difficult to resolve. It is difficult to resolve because, as it seems to me, Norwegian law is not interested in the question. Norwegian law is not as I understand it interested in the question whether a resolution of the kommunes is valid or invalid, but rather in the question whether the resolution can have an effect on third parties. Professor Woxholth said this in terms. Furthermore as it seems to me from Professor Graver's evidence there is a difference of approach in Norwegian law as between, on the one hand, acts of a kommune which impose duties on the citizens thereof and, on the other hand, all other matters including entering into contracts. Whilst an act in the former category may be automatically invalid, if done in transgression of powers, an act in the latter category involving the like transgression is not similarly automatically invalid. The upshot is that it is not easy to transpose Norwegian legal theory into English terminology and in particular not into the language of capacity.
110. The debate can be placed into context by reference to English law. In Hazell v Hammersmith L.B.C. [1992] 2 AC 1, the first of the English local authority swaps cases, Lord Templeman pointed out, at page 22, that English local authorities are not sovereign bodies and can do only such things as are expressly or impliedly authorised by Parliament. He concluded, with the concurrence of the other members of the Committee, that pursuant to the relevant legislation, the Local Government Act 1972, a local authority has no power to enter into a swap transaction. Such agreements if entered into are ultra vires and void.
111. A kommune is in this respect not in the same position as an English local authority. As Professor Graver describes, kommuner enjoy several sources of power. In relation to their public authority, which by definition can be exercised only by public bodies, the source of power is always legislation passed by the Norwegian Parliament, Stortinget. But in relation to their other powers, they enjoy several sources of power. They have the same legal powers in relation to property, the freedom of contract and institutional autonomy as are held by private persons and institutions alike, the legal basis thereof being the same as for any entity – see paragraph 15 of Professor Graver's first report. At paragraph 16 thereof Professor Graver summarised the matter in this way:

"The Local Government Act has many power-conferring rules, most of them addressing the personal and procedural aspects of municipal powers. There is no express provision of the extent of the substantive powers of a municipality. Section 1 of the Local Government Act is interpreted to confer on municipalities all legal powers that are not specifically limited in this act or other acts of Parliament. This does not include public authority to regulate matters for private citizens, where also the municipalities require specific legal basis in legislation. But when it comes to the legal powers as property-owner, the freedom of contract and institutional autonomy, municipalities have the power to do anything which is not specifically limited by legislation or Acts of Government based on legislation. In this way, the structure of municipal power and freedom differs from many other countries in Europe, since it does not require any local or municipal interest as a legal requirement for municipal acts or action."

I note also from paragraph 20 of the same report:

"Borrowing is a result of a contract, and as such the municipalities should not have need for an express legal ground for their power to undertake such obligations. The basic legal rule on the powers of the municipalities is, as described above, that they have all legal powers not expressly limited by statute, including the power to enter into contracts. When it comes to borrowing, the Local Government Act limits the powers and freedoms of the municipalities."

112. In his oral evidence Professor Graver more than once affirmed that the municipalities basically have the same position in Norwegian law as private companies and private persons. "The starting point for municipal powers entering into contract and all other matters than imposing duties on the citizens is that they have a general power to do that unless it is restricted by law". I did not understand Professor Woxholth to disagree. Professor Braathen for his part puts it thus in his first report:

"6.2 The municipalities are their own legal entities. Under Norwegian law the municipalities have as a basic assumption a general competence, which is negatively delimited. The municipalities can thus be seen, as a formal basis, both to act or not to act, they can undertake obligations and acquire rights, unless the laws impose restrictions. The Municipalities Act section 50 regulates the various aspects of municipal competence regarding loans. It provides, on the one hand, the municipalities with the power to take up loans, but at the same time restricts and regulates the purpose for which municipalities may take up loans."

113. All of the experts were I think agreed that the nature of section 50 has to be determined taking into account the historical position. There have been limits on the powers of municipalities to take up loans since the Alderman Act of 1837. A resolution to raise a loan had to be approved by the King. In 1921 the power of approval was assigned to the Ministry of Local Government. As enacted in 1992 section 50 contained in addition to subsection 1 a subsection 7 which preserved this requirement. In 2000 subsection 7 was repealed. Professor Graver said that in these circumstances it was for a Norwegian lawyer natural to speak of section 50.1 as a power conferring rule. This was because as a matter of history and tradition the raising of a loan had not been a regular commercial activity for a municipality. On the other hand, said Professor Graver, one could argue that section 50.1 should be regarded as a power limiting rule because the starting point is the general power to enter into contracts unless restricted by law.
114. It also emerged from the evidence that in the Norwegian legal system there is no clear distinction between public and private law. This is important, because it renders it difficult simply to follow the clear guidance of Hobhouse LJ in Credit Suisse v Allerdale BC [1997] QB 306 at 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 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?"

The difficulty here is that neither Norwegian public law nor Norwegian private law overtly addresses the question what is the capacity of the municipality to contract. Public law talks of its powers, but not in a manner which is necessarily synonymous with the English concept of capacity. Norwegian municipalities have the power to enter into contracts of loan, albeit only for certain purposes, whereas English local authorities lack any power to enter into interest rate swap transactions. Thus Mr Mitchell submitted that the court was getting into the realm of what Hobhouse LJ called the "more complicated" position as described by Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Limited v British Steel Corporation [1986] Ch 246 at 304:

"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."

115. I have already pointed out that the question of validity or invalidity of the resolution is not one upon which Norwegian law focuses, and that the administrative law rule of automatic invalidity of a resolution passed without competence will apply only in cases of administrative orders imposing obligations on the citizens. The concept here is "nulliteter" which as it seems to me corresponds closely to the nullity consequent upon an English local authority acting without power. The citizen can decline to obey the resolution, which is automatically invalid without the need for that invalidity to be pronounced by a court. However as I understand Professor Graver a resolution adopted to enter into a prohibited loan agreement with a third party falls into a different category. The resolution is in Norwegian legal terminology "assailable". The resolution may be determined by a court to have been invalid. The court in such circumstances has a choice whether to declare the invalidity as applying "ex tunc" or "ex nunc" although Professor Graver considered that in the case of such a resolution it would be declared invalid ex tunc, by an order having therefore retrospective effect. He was however clear that the resolution is in such circumstances not a nullity. The concept here is not "nulliteter" but "ugyldighet" which Professor Graver translated as invalidity. The distinction was borne out by Professor Graver's answer to the question whether a contract made in reliance on an invalid resolution will remain in existence until struck down. Professor Graver said very frankly that he had not given that question very deep consideration – which is unsurprising because it is not relevant to an evaluation of the position at Norwegian law. He thought however that the contract would remain in existence. This bore out his earlier answer to the effect that a municipality will have been within its legal rights to make payments pursuant to such a contract. This is in stark contrast to the English analysis of the situation where a statutory corporation enters into a contract which it is not empowered by the relevant statute to enter into. As Hobhouse LJ explained in the passage cited above, the document and the agreement it contains do not have effect as a legal contract. In law the contract does not exist. It is, and always was, a nullity. On the other hand in Norwegian law the distinction between "nullitetet" and "ugyldighet" may at the end of the day be unimportant since in either event the resolution is invalid once the court has determined that the municipality lacks substantive power to pass it.
116. Section 50 of the Local Government Act does not actually refer to the validity of either an incompetent resolution or a contract concluded in reliance upon it. Section 60 by contrast refers expressly both to resolutions and to contracts made in reliance thereon. It is Professor Graver's view that since the adoption of a resolution is the instrument by which the municipality acts, section 50 must be regarded as regulating the resolution. However, since it makes no reference to the validity of any contract entered into in reliance thereon, and since that matter is expressly dealt with in other contexts, section 50 cannot be regarded as purporting to deal with it.
117. The manner in which section 60 does deal with this point is instructive, and lends weight to Mr Mitchell's argument. Section 60 deals with the special case of a municipality which is in financial difficulties and has come under state control. Section 60 provides:

"1. Any resolution to raise a loan or any resolution to enter into a long-term contract for the renting of buildings, installations and permanent operating equipment that may cause the local authority to incur expenses beyond the next four budget years is not valid until it has been approved by the Ministry, if:

a. the municipal council of the county council has resolved to adopt an annual budget where the budget does not provide cover for all expenses,

b. the municipal council or the county council has resolved to adopt a finance plan where the finance plan does not provide cover for all expenses,

c. the municipal council or the county council has in pursuance of the second sentence of section 48(4) of this Act resolved that an accounting deficit shall be distributed over the following budget year after the accounts have been presented, or

d. the municipal or county authority does not follow the adopted plan for the covering of any deficit.

2. If any of the conditions in subsection 1 (a), (b), (c), or (d) of this section is satisfied, the Ministry shall review the legality of the budget resolution passed by the municipal council or the county council.

3. The Ministry shall establish a register of all municipal and county authorities that are subject to approval. Any person has the right to familiarise himself with what is registered in the register, and to obtain a transcript thereof.

4. Until the individual local authority is registered in the register, the Ministry may not implement approval in pursuance of subsection 1 of this section. In relation to rules of law that let it be decisive for the legal position of a third party whether the latter was aware or was not aware of a matter, what is registered in pursuance of this provision is deemed to have come to the knowledge of a third party.

5. Local authorities that enter into contracts that require approval must inform their co-contractors that they have been made subject to conditional review and approval."

118. As I understand it from Professor Graver the relevant language of subsection 1, "any resolution…is not valid" is exactly the language that was used in the now repealed section 50.7 in order to deny competence to a municipality to raise any loan without ministerial approval. It is therefore describing the self-same lack of competence as is relied upon here by the municipalities as without more rendering the loan agreements null and void. Yet section 60 sub-section 4 expressly envisages that contracts made without competence in this sense may nonetheless be binding, and prescribes a registration system pursuant to which third parties are deemed to have notice if a municipality is registered as being subject to this special regime. This approach lends weight to Mr Mitchell's argument that the relevant concept of incompetence is not equivalent to what in English law would be regarded as lack of capacity, which has the result that a contract made without capacity so to do will simply be void whatever the state of knowledge of the third party counterparty.
119. Mr Mitchell was also able to pray in aid a passage in an advice given on 1 December 2003 by the legal department of the "Kommunenes Sentral Forbund" when advising two municipalities on transactions which they were considering. At footnote 6 of that letter the KS attorneys noted:

"The House of Lords in its ruling of 24 January 1991 (Hazel v Hammersmith & Fulham) treated a case with some similarities. The court found that all swap transactions entered into by local authorities were ultra vires (illegal) in part due to the speculative elements. … Because English law is based on other competence rules than Norwegian law, the resolution has hardly more than academic interest for the questions we are asked to comment on here."

120. Mr Mitchell also asked Professor Woxholth to comment on the following passage from an article by a Danish professor, Professor Dr. Werlauff in the Journal of Legal Science 1995, 781 at pages 783-4:

"In general there are two traditional perceptions of the law that are confronted by each other. On the one hand there is the Anglo-America legal tradition that has, in principle, maintained that the legal entity's power of law is established with specific purposes in mind, where all must appreciate that actions beyond these purposes are not binding on the legal entity. Such a legal entity's power of law is therefore made relative and strong parallels may be drawn from the authority doctrine where, of course, the authority is also purpose-determined.

In contrast to this there is a continental, especially German, perception of law that considers the legal entity's power of law as being universal. The power of law is, in common with that of the physical person's, absolute and indivisible. The authority doctrine must therefore be rejected as a legal basis for the resolution of conflicts regarding the actions of bodies. The legal entity must be equated with the physical person. Its bodies are the legal entity. There is thus no place for the ultra vires doctrine."

Professor Woxholth agreed that Norwegian law was closer to the German tradition than to the Anglo-American. Whilst he had not had a real opportunity to consider the point, he also said this:

"If what is meant by the ultra vires doctrine is that something is null and void in all connection, even in relation to a third party in good faith then I would say that there is no place for ultra vires doctrine interpreted in that manner in Norwegian law."

Mr Milligan registered a protest at this text being put to Professor Woxholth – it had not been put to Professor Graver. At the time I was inclined to downplay the significance of the passage and the answer, but on further reflection both seem to me relevant to the debate. Since on this aspect of the case there was as I understood it no disagreement between Professor Graver and Professor Woxholth I do not consider that Mr Milligan or his clients have been significantly disadvantaged. To be fair to Mr Mitchell, the point which he was through his question seeking to reinforce was one clearly made in his written opening skeleton argument.

121. The high point of Mr Mitchell's argument is the experts' agreement, in advance of the trial, that in Norwegian law invalidity of the loan agreements is not an automatic consequence of invalidity of the enabling resolutions. Such agreements are not invalid if the counterparty was acting in good faith. It was common ground that a counterparty will not be regarded as in good faith if he/she knows that the municipality had exceeded its powers. There was also a dispute, which for present purposes I do not need to resolve, whether a mistake or ignorance as to the law would in this context be admitted as good faith. Professor Graver thought that a mistake as to or ignorance of the directly applicable rule stated in section 50.1 could not be admitted, for so to do would permit the good faith of the third party to undermine the efficiency of important public rules designed to protect the public interest, i.e. the liability of the taxpayers in the municipalities. He saw the operation of good faith in this context as a sort of equity based exception which has to be balanced against the public policy considerations behind the authority of public and constitutional rules. If this view is right, and it was hotly contested by Professor Woxholth, the potential application of the good faith doctrine may in this context be severely limited. However Professor Graver recognised that it could nonetheless have a part to play. A third party lender might for example be mistaken as to whether the operating equipment for the purpose of purchasing which a loan is sought is "permanent operating equipment" within section 50.1. Such an error in good faith would undoubtedly result in the loan agreement being regarded as enforceable in Norwegian law. The question therefore arises what this tells one as to the proper characterisation of the lack of substantive power on the part of the municipality.
122. This is not a point on which there has been any extensive analysis in the Norwegian literature or in decided cases. It spoke volumes I thought that Professor Graver described it as an academic question. His inclination was to regard a case in which a contract was saved in this way as an exception to the power conferring rules. In cross-examination he accepted as a possible "after the fact" rationalisation that the municipality is treated as having had the substantive power that otherwise it would not have had. However in answer to later questions he was inclined to agree that the fact that the municipality is in these circumstances held to its bargain does not lead to the proposition that a resolution that was invalid is to be treated as valid or that the municipality is deemed to have acted within its powers. This answer was given at the very end of Professor Graver's evidence by which time he had become thoroughly attuned to the distinctions which were troubling the English lawyers, points which were of little consequence to him as a Norwegian lawyer when simply applying Norwegian law in the domestic context. Professor Graver was an exceptionally careful and thoughtful witness, and on questions such as these there is no reason why he should not have wavered in his thinking. However I think his final thoughts on the matter, which happen to coincide with his first thoughts, are likely to be correct. This is certainly, as it seems to me, a more elegant solution than "deemed capacity" which was I think favoured by Professor Woxholth, albeit without enthusiasm. If this is right, then the validity of the agreement in these circumstances is simply to be regarded as an incident of the Norwegian private law of contract, of itself 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 swap agreements.
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. I agree with Mr Milligan 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, which provide:

"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—

(i) 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,

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

(iii) 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."

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.

Did the officers of Haugesund and Narvik have authority to enter into the contracts or the amendments thereto?

124. 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.

Does the Norwegian good faith principle go to capacity to contract or to enforceability?

125. In reaching my conclusion on capacity I have impliedly resolved the next question which I have to decide. This is the question whether the Norwegian good faith principle should itself be regarded as going to capacity or to enforceability. If the former, then I must resolve whether Depfa's good faith defence would succeed in Norwegian law. If the latter, the issue is irrelevant. English law is the chosen proper law of the agreements, and it is English law which must determine whether they are enforceable.
126. As I have indicated above I have come to the conclusion that the possible enforceability of the agreements in Norwegian law is an incident of Norwegian private law. It does not go to the capacity of the municipalities. The result in Norwegian law if the defence succeeds is not that the resolution becomes valid, simply that the contract made in reliance thereon is enforceable. I am happy to be able to reach this conclusion because Professors Graver and Woxholth were agreed that in Norwegian law it is not even of theoretical interest to consider whether the conclusion that the municipalities are held to their bargains is as a result of the municipalities being deemed to have had capacity to adopt the resolutions. Moreover I did not understand Professor Woxholth to embrace deemed capacity with any enthusiasm. He was more concerned with the effect on third parties, and he regarded it as logical to say that if the effect of invalidity is not transferred to a third party, then "some kind of capacity is deemed to be there some place". However in reaching this conclusion Professor Woxholth went further than a Norwegian lawyer would ever in practice need to go. Furthermore I do not agree with Mr Railton that this is the only logical analysis. It was not the analysis which ultimately commended itself to Professor Graver and I do not consider that it is a necessary analysis. The proper analysis in my view is that Norwegian law has a theory of private law which permits a third party in certain circumstances to enforce a contract made with a municipality which lacked the power to make it. It is wholly unnecessary to go further and to enquire whether in such circumstances the municipality is deemed to have the power which it lacks. The contract is enforceable notwithstanding the municipality lacked the relevant power, and the lack of power is itself the starting point of the argument. I decline to attribute to the Norwegian private law theory an aspect of public law competence which Norwegian lawyers do not readily recognise.
127. I agree with Mr Milligan that Mr Railton can derive no assistance from Janred Properties Limited v Ente Nzionale Italiano per il Turismo [1989] 2 All ER 444. In that case the expert evidence of Italian law as to the effect of the lack of ministerial approval was that the contract was voidable, not as the defendant in the case contended and as Mr Railton incorrectly submits at paragraph 4.31 of his written closing, ultra vires and void. That being so lack of ministerial approval did not go to the capacity of the Italian state tourist office. I also agree with Mr Milligan that reference to paragraphs 26 to 29 of the judgment of Mance LJ in Raiffeisen Zentralbank Osterreich AG v Five Star Trading [2001] QB 825 does not here assist. The overall aim of the three stage process of which characterisation of the relevant issue is the first is indeed to identify the most appropriate law to govern a particular issue. However the loan agreements are expressly governed by English law. English private international law requires the question of capacity to be resolved by reference to the law of the place of incorporation, but that does not render it appropriate to seek to characterise as going to capacity an issue which the local law does not so recognise. Indeed here the local law does not even recognise the issue as arising, and for good measure does not regard it as even interesting. In such circumstances it can hardly be the most appropriate solution to identify Norwegian law as governing the issue. In truth the issue is the availability of a private law exception or defence whereby the consequences of incapacity cannot be relied upon as against a third party. It is only appropriate that the availability of private law defences should be a matter for the proper law, and that is of course the effect of the English conflict rule. It is tempting to say that in the present circumstances Depfa should be given whatever advantage Norwegian law might in this regard afford them. However to succumb to that temptation would I think be to err in principle and must therefore be resisted. English law was expressly chosen as the proper law.

Could Depfa, if it were relevant, avail itself of the Norwegian good faith rule?

128. It follows that I have no need to resolve the question whether Depfa could, if it were available to them, avail themselves of the good faith rule in Norwegian law. However since I heard evidence and argument on the point I should set out my conclusions, albeit I intend to do so quite shortly.
129. The mistake made by Depfa was to believe that its transactions with Haugesund and Narvik were not to be regarded as loans within the meaning of the word "loan" as it is used in section 50.1 of the Local Government Act. It is accepted on all sides that that is to be characterised as a mistake of law. The resolution of the question depends therefore on two further issues:

i) Can a mistake of law be relied upon at all?

ii) If it can, does Depfa's good faith, if established, outweigh the need for the efficiency of the public law?

130. It was originally Professor Graver's view that a mistake as to the meaning of the word loan in section 50.1, being a mistake of law as to the meaning of the core provision limiting the competence of the municipalities, could not be the foundation of a successful invocation of the good faith doctrine. Professor Woxholth did not address this issue in his first report. Professor Braathen drew no distinction in this context between mistakes of law and mistakes of fact.
131. In his supplementary report Professor Woxholth introduced into the discussion consideration of a doctoral thesis written by Aage Thor Falkanger, now Professor Falkanger, and published in Oslo in 1999 with the title:

"GOOD FAITH – A Study of the Requirement of Good Faith as a Condition for Acquisition or Enforcement of Private Rights".

As its title suggests this work concerns private law, not the interface of public and private law with which the current debate is concerned. I have been supplied with translations of only a few pages of this extensive work, and the translations initially provided were inadequate. Even the translations later provided are unreliable. For example, after much confusion on my part I have worked out that the translation I have been given of page 250 of the book contains a critical mistranslation, where in the passage after the diagram the words in Norwegian "the indirect rules" have been translated as "the direct rules". I hope I will be forgiven for saying that Professor Falkanger's thesis is not easy to understand and I have no doubt that for me much has, sometimes literally, been lost in translation. However studying the work for myself as best I can I take the central thrust of the thesis, at any rate as it appears in those few pages which have been translated for me, to be this:

i) A condition of acquiring a right in good faith is a direct rule. An example would be that, in Norwegian law, the period required for the acquisition of prescriptive rights over land is fifty years.

ii) Any rule of law which does not directly concern the acquisition of a right in good faith is an indirect rule.

iii) A mistake as to an indirect rule may form the basis of the acquisition of a right in good faith.

From this it follows that ignorance related to the rule of law which is to be applied in determining whether a right has been acquired in good faith, which Professor Falkanger calls "the good faith rule", can never give to the ignorant party a better right than if he had properly understood the law. Professor Falkanger says in terms that ignorance about the applicable direct legal principles, including the good faith rules themselves, cannot form a basis for any acquisition of good faith, by which possibly is meant acquisition in good faith.

132. Introduction of this material led Professor Graver slightly to modify his approach. He was content to accept that the distinction between direct and indirect rules might equally in this context have a part to play in public law, although he considered that it was too early fully to embrace its introduction into the public law arena where very different factors are at play than in private law. In consequence, as I understood him, Professor Graver's view was not so much that in the present case a mistake of law should simply of itself be regarded as ineligible to found a good faith acquisition of rights, but rather that the present mistake was in any event, in Professor Falkanger's terminology, a mistake as to the direct rule, i.e. the meaning of section 50.1. However that may be, Professor Graver maintained his opinion that a mistake in good faith of that nature could simply not be permitted to undermine the efficiency of so significant a part of the public law. In that regard he noted Professor Falkanger's treatment of a case in the Supreme Court concerning ignorance of the formal requirements of a will. That rule of law contains no subjective element, or what Professor Graver called subjective property. To allow persons to arrange such matters according to their own understanding of the applicable law would be unthinkable: "such individual pluralism will almost lead to anarchy". I should mention that this last example bears out my own understanding of Professor Falkanger's thesis, which is that direct rules are not confined to good faith rules. They include good faith rules but they go beyond them.
133. However I have to admit that I have difficulty in understanding the precise sense in which Professor Falkanger uses the expression "good faith rules", which of necessity meant that I had some difficulty in understanding much of the evidence of Professor Woxholth on this point. The view of Professor Woxholth was that the direct rule is the rule which is being applied in any given case, and in the context of an enquiry such as the present as to the availability of a good faith exception or defence, that is necessarily the good faith rule. As I understood him his view was that the direct rule can only be the good faith rule. My basic difficulty in understanding this approach is that I do not understand what is meant by a good faith rule, since it is not a classification known to the law. As Professor Graver pointed out, good faith is not a body of law in itself. Good faith is rather a criterion which is sometimes applied to determine whether a mistaken belief was justified in relation to the claiming of a right. It seems to me that Professor Falkanger's classification of direct rules is not confined to "good faith" rules. The example which he himself gives on page 58 of his book, the formal requirements for the validity of a will, is of a direct rule which contains no good faith element. I cannot readily understand why the same is not in principle true of section 50.1 of the Local Government Act, at any rate insofar as it relates to the core element of the transaction on which each side thereto can equally form an objective view, viz, whether or not it is a loan within the meaning of the section. By contrast, when it comes to a consideration of the purpose of a loan, there is an inequality of knowledge, or sources of knowledge, as between the parties to the transaction. Professor Graver described the general scope of section 50.1, i.e. that it applies to loans, as being a "non-subjective property" and the purposes for which loans may permissibly be taken as "subjective properties". That is why he saw the possibility of admissible good faith as to the purposes but not as regards the general scope of the section.
134. Ultimately I doubt the utility in this discussion of the expression "good faith rule" because I cannot understand how one can be mistaken as to whether one is in good faith or not. On the other hand the distinction between direct and indirect rules is I think of some assistance and may contribute to an understanding of the three Supreme Court cases which were relied on in this connection. Rt 1959 p525 concerned an accident involving an unknown car driver. It was a freak accident in which a fifteen year old boy, Olaf Berge, was injured as a result of what was held to be "the use of a motor vehicle". The relevant limitation period was three years from the date on which the boy and his guardian, his mother, knew of the injury and of the person "who bore responsibility in this". Neither Olaf Berge and his mother nor a "legal counsellor" whom they consulted soon after the accident knew of a provision in the Motor Vehicle Act pursuant to which there existed a "Joint Office" which could be made liable in respect of damage caused by an unknown vehicle driver. The boy and his mother got to know about it later. A claim was allowed to be brought out of time. Professor Graver thought that the direct rule here in play was the Limitation Act. It would not have availed to say that the boy and his mother were unaware of the three year rule. The indirect rule however was section 11 of the Motor Vehicle Act, which provided an avenue of recourse in relation to damage caused by an unknown driver. Professor Woxholth agreed with this analysis. Although he pointed out that it is also a case in which the Supreme Court granted relief where incorrect legal advice had been relied upon, the critical point for present purposes is that that was advice as to the indirect rule, the availability of a remedy against the Joint Office.
135. The next case, Rt 1979 p492 likewise concerned a claim brought out of time. Lapp reindeer herders in Finnmark brought an action out of time in respect of an invasion of their grazing rights consequent upon the construction by the Ministry of Defence of telecommunications installations on their grazing lands. At the relevant time the local rules as to the scope of the state's right to occupy unregistered land were unclear. The Lapps were unaware that they had a legal right which had been infringed. Enquiries made of the Lapp bailiff, the state's representative responsible for furnishing the Lapp people with information as to their rights and obligations, led them to believe that they enjoyed no rights. Special weight was given to their ethnic minority status, language abilities and unusual lifestyle. Exceptionally, they were allowed to bring a claim out of time where their failure to sue in time was attributable to their ignorance of the law. Their ignorance was not as to the directly applicable three-year limitation period but as to the indirectly applicable rule, that concerning their proprietary rights. Again Professor Woxholth agreed with Professor Graver's analysis.
136. The third case, Rt 2008 – 1615, arose in public law and is instructive. It again concerned limitation. Here the relevant statutory provision provided that if the creditor has not asserted the claim because he lacked the necessary knowledge of the claim or of the debtor, the period of limitation shall expire at the earliest one year after the date on which the creditor obtains or should have obtained such knowledge. Hoteliers knew of the VAT rules, but failed to appreciate that they permitted apportionment and deduction of input tax incurred on activities which were only partially subject to output tax. The tax authorities had themselves issued circulars advising that in such circumstances no right of deduction obtained. The hoteliers' claim to make a deduction out of time was nonetheless disallowed. Judge Stabel, in the majority, said:

"37. In the present case it is clear that we are within the area of the tax-liable complainant companies. The case concerns a key provision, introduced of regard for the complainants, namely the Act relating to value added tax section 21 on deductions for ingoing value added tax. The problem in the case is however not lack of knowledge of the existence of the rules, but of the correct legal interpretation. The lack of knowledge is in other words linked to the correct interpretation of the law. The State has pleaded that this type of ignorance of the law lies on the borderline of what can be deemed to be lack of knowledge pursuant to Act relating to the limitation of claims section 10 no. 1. …

41. My summary is, that unless very special circumstances exist, preferentially with the claimant, the uncertainty of whether a case will succeed that is exclusively attributable to an ambiguous legal position, will not be accepted as grounds for excuse. The objective behind the rules on time-barring/limitation periods indicate that whomsoever has a claim to pursue does so on the basis of his own assessment of the available sources of law, even if there is no final clarification by the courts. This consideration becomes even more applicable in relation to the Act relating to the limitation of claims section 10 no. 1. …

44. As I have previously mentioned, the companies themselves have a mandatory obligation to make themselves familiar with value added tax legislation. This is emphasised by the system of self-declaration – it is the taxpayer who has incurred and knows the scope of the costs for which right of deduction is claimed. It is only these persons that in the first instance can evaluate whether a cost or expense is relevant in relation to the taxable part of the activities. When one has chosen to comply with the tax authority's understanding of the scope of the right of deduction in the Act's section 21 first paragraph, they must, when evaluating a supplementary limitation period pursuant to section 10 no. 1 as the starting point bear the risk for this themselves."

Again it was Professor Graver's analysis that here the directly applicable rule was the Limitation Act, whilst the VAT rules were the indirectly applicable rules. Here adoption of an incorrect legal interpretation as to the indirect rule did not avail the claimants. This case as it seems to me affords a quite compelling parallel with the present. Even a mistake as to the indirect rule did not avail, moreover in circumstances where the relevant public authority had issued incorrect guidance.

137. The upshot is that I consider that a Norwegian court is unlikely to regard as relevant to the invocation of the good faith doctrine that Depfa made a mistake as to the proper interpretation of the word "loan" as used in section 50.1 of the Act.
138. Even if I am wrong about that, it was at the least common ground that in the present context it is relevant to consider whether to permit ignorance of the law to found an invocation of the good faith doctrine will undermine the efficiency of the public law. On this point the difference between Professor Graver and Professor Woxholth was I think one of emphasis. Professor Graver was inclined to think that undermining the efficiency of public law represented an insurmountable obstacle in itself, whereas Professor Woxholth was more inclined to regard this as a balancing exercise, in which the purposes of section 50 are weighed against the circumstances in which Depfa came to make its error. I did not derive great assistance from Professor Braathen in this connection but I did not understand him to dissent from what I have described as being at the least common ground.
139. Professor Woxholth was entirely supportive of the decision of the majority of the Supreme Court in the VAT deduction case. Given that that case concerned what he acknowledged to be the efficiency of the indirect rule, I consider that the present must be an a fortiori case. The present case concerns a mistake as to the direct rule, as to the basic meaning of the power-conferring or power-limiting rule, section 50.1. 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. It would drive a coach and horses through that protection to uphold a loan agreement concluded with a third party bank on the basis that the bank mistakenly did not consider that the transaction amounted to a loan within the meaning of the Act.
140. I am not sure that I agree with Mr Railton that Professor Graver acknowledged that there might be exceptional cases in which the efficiency of the public law would have to yield, although that may have been a logical consequence of what he did undoubtedly say in the context of his view as to the opportunity to rely upon a mistake of law. But even if this was Professor Graver's view, there is in my judgment no basis whatever for regarding the present as an exceptional case. If the VAT case was not exceptional, I do not see how this one can be. The fact that Depfa is, from the Norwegian point of view, an overseas bank seems to me of no relevance whatever. Likewise the fact that the bank for its own protection sought Norwegian legal advice from an impeccable source. I cannot see how in the context of a bank deciding to operate in the local market either consideration can be regarded as rendering the circumstances exceptional.

Did Depfa act in good faith?

141. It follows that I have no need to consider separately in this context whether Depfa acted in good faith. It will however be apparent from the findings I have already set out and from my conclusions in relation to the counterclaim in restitution that I consider that they did.

Depfa's counterclaim in restitution

142. I turn next to Depfa's counterclaim in restitution. Depfa relies on three grounds for its claim for restitution, namely (i) mistake, (ii) failure of consideration, and (iii) absence of consideration. These were the three "unjust factors" applied by the courts in the English swap cases. Payment under a mistake, whether of fact or law, is an established basis for restitution, as is accepted by the municipalities in their pleadings. Failure of consideration, in the sense that there has been failed counter-performance by the municipalities, is also an established basis for restitution – see for example Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669 at 682-683 per Lord Goff, and Virgo, The Principles of the Law of Restitution, 2^nd Edition, at page 371. Absence of consideration, in the sense of the municipalities' promises being void, is a ground supported in the cases – see for example, Westdeutsche Landesbank at page 710 per Lord Browne-Wilkinson and at [1994] 4 All England 890 at 930 per Hobhouse J at first instance; Guinness Mahon & Co Ltd v Kensington & Chelsea Royal London BC [1999] QB 215 at 230 per Morritt LJ and at 239-240 per Robert Walker LJ. There remains however some academic controversy in relation to this latter ground, and it is questionable whether it adds anything to the wider view of failure of consideration – see for example Burrows, The Law of Restitution, 2^nd Edition, at pages 325, 386-388, 397-401 and Virgo, op. cit. at pages 371-386.
143. Mr Milligan submits that, looked at objectively, it was apparent to Depfa that when paying under the loan agreements, it was taking the risk that they were invalid. Mr Milligan submits that Depfa is in consequence precluded from recovery under all three of the bases of recovery upon which it relies.
144. Mr Railton accepts that conscious risk taking would preclude recovery on the basis of mistake. He contends however that any doubts on the part of Depfa as to the validity of the transaction are irrelevant in relation to the other two bases for recovery.
145. This is I think a somewhat arid controversy, and in view of my conclusion on the facts, irrelevant. Mr Railton accepted that, in relation to the other heads of recovery, a finding that the bank intended to make an out-and-out payment come what may would preclude Depfa's success. It seems to me that the two enquiries are in this context the same, although of course that might not in all cases be so. However where a bank makes a payment pursuant to what it understands to be a valid and binding loan agreement, it is obviously doing so on the basis of that agreement and not otherwise. It could only be shown that it was the intention of the bank that the money advanced pursuant to the agreement should be retained by the municipality in any event if it could be shown that the bank took the risk that the sum would be irrecoverable, which in context means taking the risk that the agreements are unenforceable. The enquiry is the same.
146. The impetus for this argument of Mr Milligan is provided by the way in which Lord Hope dealt with the point in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 at page 410. Lord Hope there said:

"Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong – and that is so whether the issue is one of fact or one of law."

I note that the allegation in fact pleaded against Depfa in this connection is indeed that when it made the payments to the municipalities it doubted if the loan agreements were valid.

147. In Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners and another [2006] 3 WLR 781 at page 791 Lord Hoffmann referred to the two sentences from the passage in Lord Hope's speech in Kleinwort Benson which referred to a state of doubt and said this:

"This was a very compressed remark in the course of a discussion of other matters and I do not think that Lord Hope could have meant that a state of doubt was actually inconsistent with making a mistake. Contestants in quiz shows may have doubts about the answer ('it sounds like Haydn, but then it may be Mozart') but if they then give the wrong answer, they have made a mistake. The real point is whether the person who made the payment took the risk that he might be wrong. If he did, then he cannot recover the money.

… Likewise, the circumstances in which a payment is made may show that the person who made the payment took the risk that, if the question was fully litigated, it might turn out that he did not owe the money. … I would not regard the fact that the person making the payment had doubts about his liability as conclusive of the question of whether he took the risk, particularly if the existence of these doubts was unknown to the receiving party. It would be strange if the party whose lawyer had raised a doubt on the question but who decided nevertheless that he had better pay should be in a worse position than a party who had no doubts because he had never taken any advice, particularly if the receiving party had no idea that there was any difference in the circumstances in which the two payments had been made."

In the same case at page 803 Lord Hope himself returned to the theme. He pointed out that he had concluded the relevant passage of his earlier speech by saying that the critical question was whether the payer would have made the payment if he had known what he is now being told was the law. He went on:

"The difficult question is what degree of doubt is compatible with a mistake claim … I see the issue as being essentially one of causation. What was the effect of the mistake on the payer? But the basic principle is, of course, that of unjust enrichment. At what point can it be said that the payee has been unjustly enriched? The answer to these questions will depend on the facts of the case. … the payer's reason for making the payment despite his doubt will have a part to play in resolving the issue as to whether the payer, who would not have made the payment had he known the true state of the facts or the law at the time of the payment, should bear the risk or can recover on the ground that he was mistaken."

148. Seen in this light it is a most unlikely conclusion that a bank which has doubts over the validity of a proposed loan of a sum of the order of £20,000,000 and takes legal advice in order to resolve those doubts can properly be regarded as thereafter taking the risk that it is mistaken as to the validity of the transaction and intends that in the event that it is mistaken, the borrower should simply retain the money. This is not a sensible or a realistic conclusion. I should reach it only if driven to it.
149. In that regard Mr Milligan mounted a powerful argument to the effect that Depfa knew that it was taking a risk on section 50. He pointed out that Depfa had never before or indeed since lent money to a public sector borrower to invest in financial markets and that Depfa was keen to break into the Norwegian market. He suggested that Depfa was well aware from the outset that loans to Norwegian municipalities for investment in financial markets were prohibited. To be more strictly accurate, Depfa was aware that loans for non-budgetary investment purposes were prohibited, although this comes to the same thing. He also pointed out that Depfa was well aware that in commercial terms documenting the transaction as a swap, as opposed to a conventional loan, would make no difference. So far, I agree with Mr Milligan's analysis. However it is at this point that I part company with him. He submitted that Depfa was well aware that the lawfulness of the swaps depended upon the interpretation of section 50, that that interpretation might turn out to be wrong and that if Wikborg Rein's reasons were the same as those in the Vik letter or the Bjerknes opinion, they were implausible. Put another way, Depfa knew that section 50 was a block, that ways around the block had been suggested but that those ways were questionable. Moreover a block on capacity was something which Depfa had never before or indeed since experienced.
150. Mr Pheifer could indeed not recall another transaction where such oddities were thrown up as to the capacity of the counterparty to undertake the transaction. Mr Pheifer was as I have already recorded Head of the Legal Department at Depfa and once the proposal had obtained the approval of the Credit Committee it was ultimately his responsibility to decide whether Depfa would proceed. Mr Pheifer's attitude from the outset was that the bank would need to obtain an opinion from Norwegian lawyers before it could commit itself to the transaction. For that reason if for none other Mr Pheifer had simply not analysed the Norwegian legal position in anything like the depth which Mr Milligan attributed to him. In the early stages Mr Pheifer entrusted the matter to Mr O'Sullivan. This was for the purpose of performing the bank's own analysis, but neither Mr Pheifer nor Mr O'Sullivan had any expertise in Norwegian law and the bank was always in due course going to engage Norwegian counsel before committing to the transaction. The input of Mr O'Sullivan was sufficient to get the matter beyond the stage of credit committee approval – it demonstrated that whilst there were questions it was worth taking the matter forward at that stage and consulting Norwegian counsel. Mr Pheifer could not recall when actually he saw Mr O'Sullivan's memorandum but it seems likely that he saw it before he consulted Wikborg Rein. He had also seen the Vik letter. He saw Mr O'Sullivan's analysis of both the Vik letter and the Bjerknes opinion but it seems unlikely that he actually saw or read the Bjerknes opinion at this stage – indeed I rather doubt if he ever read it before Depfa was committed to the transactions. That is not a criticism – he had delegated the initial task to Mr O'Sullivan and if the outcome of that exercise was sufficiently encouraging he would take the matter forward by consulting Norwegian counsel. The outcome was sufficiently encouraging – as Mr Pheifer put it: "Well, on the face of it, we had the Ministry of Local – was it Planning or Government – giving confirmation that the structure appeared to work and we had a Norwegian legal opinion confirming that it worked. They both raised questions. But it would have given us encouragement that we should look into it further."
151. Mr Pheifer was asked whether the reality was not that the bank was being told that by adopting a particular structure, it could "get round the prohibition in section 50". I found instructive Mr Pheifer's reaction to this question. It was:

"Well, you make it sound as if we are trying to do something almost illegal. You know, we clearly weren't. We knew there was a prohibition on the-they had difficulties raising funds, and, you know, Terra had come up with this new structure and so we were keen to explore that. In a legal manner. We performed our own analysis and were going to engage Norwegian counsel.

Q. So you would agree that what was being proposed as the structure was a means of getting round paragraph 50 in a legal way?

A. Well, I wouldn't use that terminology, but I think it's-

Q. What terminology would you use?

A. Clearly we're trying to lend money to Norwegian municipalities in a form that would be acceptable to them and in a legal manner, other than by way of- by means of an ordinary loan agreement.

Q. But still getting round what would otherwise be a prohibition, albeit in a legal way, isn't that right?

A. I prefer not to use those words. I've tried to express it slightly differently.

MR JUSTICE TOMLINSON: Would it come to this, that on the face of it there appeared to be a statutory prohibition barring the transaction, but you had advice, (1) from a Norwegian law firm and (2) from the Ministry, which appeared to indicate that this was not after all an obstacle?

A. Yes, I mean, this was for- yes, the existing Norwegian legal opinion was for a particular transaction and it was issued at a different time, and likewise the Ministry letter was for a different municipality and it was issued at a different time. I didn't know if there were other aspects of regulations for Haugesund, for example, or over the course of time it might have changed. So I thought that, you know, clearly it was worth taking forward at this stage and going to Norwegian counsel."

This is not to my mind the language of taking a risk as to legality. On the contrary, it is the language of appropriate caution. Banks may not enjoy the reputation for cautious lending which once they did, but whilst Depfa was keen to break into this market it is not one which offers spectacular returns. The returns are commensurate with the low credit risk of the public authorities. Mr Pheifer did not strike me as a man who would throw caution to the winds in order to secure this business, and there was no suggestion that he would benefit financially from conclusion of the transactions, other than that no doubt he shared in the overall success of the bank. I can see no reason why he should take a risk and, as the lawyer ultimately responsible for deciding whether the deal should proceed, every reason why he should not.

152. Mr Pheifer was naturally much pressed with the point that the reasons put forward by the Ministry and by Bjerknes for regarding what appeared to be an obstacle as not an obstacle were not convincing. I am quite satisfied that Mr Pheifer did not at the time see the matter in that way. He simply did not condescend to that depth of analysis. He knew there were questions, but as he was always going to involve Norwegian counsel to look at the structure and give an opinion on the specific transactions which the bank was considering undertaking he had no need to perform what he termed "the forensic analysis" of the Vik letter and the Bjerknes opinion – indeed the latter he did not see. As I have already set out above, on 14 June 2004, having ascertained that Wikborg Rein were able to assist, Mr Pheifer e-mailed Mr Rasmussen as follows:

"I understand that there are restrictions on Munis entering into loan agreements and that they have decided to structure this deal under an ISDA Master Agreement as a one-off deal. Commercially it will take on the characteristics of a loan with an up-front payment by Depfa and thereafter a series of payments to be made by the Muni over the life of the asset.

I am keen to obtain the opinion to ensure that there is no prohibition on the Muni from entering into Swap Agreements, to receive comfort that it has been properly executed, is within their power and authority and legally valid and enforceable."

On 17 June Mr Rasmussen replied, by e-mail, as again I have already set out above:

"Please find attached a draft form of opinion to be rendered in respect of Norwegian municipalities.

We have considered whether the transaction would qualify as a loan under the Norwegian Municipality Act. Based on a circular from the Norwegian ministry on Municipalities, the transaction is in our opinion not a loan under such Act."

Thereafter there followed the Wikborg Rein opinion in the unequivocal and unqualified terms which I have again already set out.

153. I am quite satisfied that Mr Pheifer did not analyse the position in such stark terms as Mr Milligan suggests. He did not at the time focus on the fact that the question of the legality of the arrangements depended on whether, as a question of interpretation of section 50 of the Norwegian Local Government Act, the swap constituted a loan. Nor did it occur to Mr Pheifer that if the reasons for Mr Rasmussen's opinion were the same as those of the Ministry and Bjerknes, those reasons were unconvincing. Mr Milligan put it to Mr Pheifer that he must have been aware that opinions on questions of interpretation may be wrong. I accept Mr Pheifer's evidence that that thought was not present in his mind. Of course all lawyers know that on a question of construction there is often room for two views, but the whole purpose of Mr Pheifer seeking the opinion of one of the leading law firms in Norway was to obtain what he thought would be the best available advice on the point. It is instructive to recall yet again how he put the matter in his e-mail of 14 June to Mr Rasmussen – he wanted an opinion "to ensure that there is no prohibition on the Muni from entering into the swap agreements, to receive comfort that it has been properly executed, is within their power and authority and legally valid and enforceable". Mr Pheifer did not wish to take a risk and he did not think that he was taking a risk. It is simply unrealistic and wrong to characterise Mr Pheifer's attitude as taking the risk that Mr Rasmussen might be mistaken and intending that, in such circumstances, the municipalities would simply keep the money. Mr Pheifer was not consciously taking any risks on the legality of the transaction. He was relying on the advice of reputable and highly regarded Norwegian lawyers and he had no reason to question their opinion, which was unqualified. He was entitled to accept it at face value. Had Mr Pheifer been conscious of any risk as to the capacity of the municipalities to enter into the transactions Depfa would not have proceeded.

Did Depfa rely upon Wikborg Rein's advice?

154. I have already answered this question in the context of Depfa's counterclaim in restitution. However in view of Mr Mitchell's sustained argument for the contrary conclusion in relation to Depfa's claim against Wikborg Rein, I should deal with the point in a little greater detail and it is convenient to do so at this stage.
155. Mr Mitchell made much of the fact that after Credit Committee approval for the Haugesund transaction had been given on 13 January 2004 Mr Pheifer re-drafted the Schedule to the ISDA Master Agreement in a form which he believed appropriate to the zero coupon swap transaction. This draft envisaged that "Party B", which would be the municipality, would be under an obligation to furnish a legal opinion in form and substance satisfactory to Party A, the bank, as to its capacity to enter into the agreement. Mr Mitchell suggested that this demonstrated that Mr O'Sullivan's earlier suggestion at the 12 August 2003 meeting with Terra that Depfa would need an external legal opinion to confirm the legality and enforceability of the structure had been dropped or was treated as satisfied in the circumstances. He also suggested that it showed that Depfa had made up its mind on the question of the structure of the transaction.
156. However Mr Mitchell in my view attempted to make too much of this re-draft of the Schedule. Mr Pheifer was asked about it at trial. He said that the bank had not at that time done very many swaps with public sector entities but that if they were entering into a swap with a public sector entity they would try to get a legal opinion from the entity as a starting point, which could possibly be an in-house legal opinion. However the bank might also obtain its own legal opinion. That is of course precisely what Mr Pheifer proceeded to do when on 11 May 2004 he approached Wikborg Rein to ascertain their availability to advise. In due course in his e-mail of 17 June 2004 Mr Rasmussen of Wikborg Rein pointed out that the Schedule should identify Depfa as the party delivering the legal opinion, which Mr Pheifer acknowledged to be correct.
157. After the Haugesund transaction had been completed a telling exchange of e-mails took place between Mr Witmeur and Mr Pheifer. On 5 August 2004 Mr Witmeur enquired whether future transactions with Norwegian municipalities could proceed without a legal opinion since it had been confirmed that municipalities could "borrow by virtue of a swap if they have future receivables from energy production etc". Mr Pheifer replied that he would be reluctant to remove this requirement. He pointed out that although the existing legal opinion from Wikborg Rein did not make it clear it was specific to Haugesund and that the bank would need confirmation in each case that each municipality or borrower could enter into swap agreements. This policy was reflected in a checklist of documents sent by Depfa to Mr Norberg of Terra on 16 August 2004. It itemised the information and documents which in any future transaction Depfa would need to have before seeking a legal opinion. Mr Pheifer in evidence rejected the suggestion that Depfa had reached a decision on the legality of the structure before the summer of 2004, and that all that Depfa then wanted was an opinion which would comply with the ISDA requirements. He also rejected the suggestion that had Mr Rasmussen's advice been negative then Depfa would simply have shopped around for another firm of lawyers who would have been prepared to give an opinion in agreement with that of Messrs Bjerknes. His rejection was credible and convincing and is entirely borne out by how he conducted these transactions at the time.
158. In relation to the Narvik transaction Mr Pheifer approached Mr Rasmussen of Wikborg Rein a few days before the Credit Committee was asked to increase Narvik's credit limit to NOK 190 million. On 25 August 2005 he emailed him in these terms:

"You will recall that you worked on a zero coupon swap for us with the city of Haugesund last year providing us with a legal opinion reviewing the CPs [conditions precedent] and acting (through your London offices) as London process agent for the city.

We are doing a similar transaction now with Narvik and hope that you will be available and willing to perform a similar service as the last time.

Please could you confirm and give us an indication of your likely costs?"

The contractual documentation in relation to the Narvik transaction was so far as I can tell identical to that in the Haugesund transaction, save of course as to term and amounts. The internal approval and "conditions precedent" documents were sent to Mr Rasmussen not by Mr Pheifer but by, I think, Mr Norberg. There was some delay in their provision, which did not occur until 6 September 2005. In consequence Mr Rasmussen's opinion was not received until 7 September 2005, although the first version thereof omitted reference to the trade confirmation, necessarily so since that was not executed until 8 September 2005. Thus on the morning of 8 September Ms Sheil notified Mr Rasmussen that the bank hoped that the confirmation would be signed that morning, enclosed a copy of the draft, and asked him to add this to the recital of documents examined once he had received a signed copy of the confirmation, which he did later that day. The delay between Narvik and the bank entering into the proforma ISDA Master Agreement on 2 September and entering into the zero coupon swap evidenced by the trade confirmation of 8 September was so far as I can see largely attributable to the delay in submission to Mr Rasmussen of a copy of the Narvik Council resolution of 30 June 2005. It is axiomatic that Depfa relied upon Wikborg Rein's opinion in entering into the "swap". They did not enter into it until Mr Rasmussen had confirmed that he had reviewed the Narvik resolution. I am quite satisfied that Depfa relied upon Wikborg Rein's opinion in entering into the Narvik swap. Obtaining the opinion was not simply a charade, it was a matter of substance. Without a positive opinion from Wikborg Rein, or had Wikborg Rein identified a material risk, the Narvik transaction would not have proceeded, just as the Haugesund transaction would not have done.

159. The Haugesund swap was extended by one year in May 2006. Depfa's Legal Department was not consulted over this extension and so no advice was sought from Wikborg Rein as to Haugesund's capacity to enter into it.
160. Wikborg Rein's opinion was sought in relation to the amendment to the Narvik swap. By definition the additional advance of NOK 5.7 million did not relate to the notionally capitalised income from the property tax, since that income had already served as the basis for the calculation of the advance made in September 2005. However Depfa did not know why Narvik wished to restructure and did not enquire. Hence all Mr Rasmussen was told in response to his request for the "commercial reasoning behind the amendments" was "we agreed with Narvik that they could restructure the deal so they received an up-front amount of NOK 5.7 million on 27 June 2006 and the cost of taking this additional up-front amount is reflected in the increased margin for Depfa. We need to confirm that Narvik has the capacity to amend this transaction under the existing resolutions and that is what we would like Wikborg Rein to opine on". Additionally, Mr Rasmussen had a copy of a confirmation signed by the Mayor of Narvik that entering into the restructured agreement was within the original decision of the City Council "and associated to the entering of the 0-coupon swap". Mr Rasmussen was consulted on 26 June 2006 and did not provide his opinion until 12 July. Delay at his end was caused by pressure of work and at the bank Ms Sheil was on holiday during some of the relevant period, which may have led to the matter not being chased up. Mr Rasmussen's advice was that the amendment of the original trade confirmation "does not conflict with the resolutions set out in the Minutes" of the meeting of the municipal council of Narvik dated 30 June 2005. The advance of the further NOK 5.7 million was in fact made on 27 June, prior to the advice being received, as Mr Rasmussen had in fact been advised on 10 July. It was however the unchallenged evidence of Ms Sheil that had Wikborg Rein given different advice Depfa would have taken appropriate action, the precise response depending upon the nature of the advice. If there had been a fundamental problem identified, Depfa would she said have sought to unwind the trade and recover payment.
161. I do not accept that this episode casts doubt upon Depfa's assertion that it placed reliance upon the advice of Wikborg Rein in relation to the capacity of the municipalities to enter into the swap transactions. If anything it reinforces it. Mr Pheifer could not remember any involvement with the Narvik amendment which was largely handled by his colleague in the Legal Department Bernie Connolly. However an e-mail of 30 June 2006 from Ms Sheil to Client Transaction Management in Copenhagen revealed that she had just had a conference call with "Nick/Bernie" re the Narvik amendment "where we went through all the facts again and they have decided that they need to instruct Wikborg Rein to ensure that this is within the capacity of the original resolutions on this trade". Ms Connolly had in fact already contacted Mr Rasmussen on 26 June but this further discussion will no doubt have revolved around whether the signed confirmation of the Mayor (which Depfa confusingly wrongly identified as the senior civil servant in the municipality) which had come forward that day would suffice. It seems likely that the "Nick" referred to in this e-mail is Mr Pheifer, although I do not think that anyone was asked about this at trial. However that may be, the reaction of the Legal Department was that they required legal advice on the restructuring. On 23 June Ms Sheil had been in doubt whether external advice would be required – it would she thought depend upon the nature of the documentation received from Narvik dealing with their capacity to enter into the amendment – hence her pressing Mr Witmeur on that day for something before payment was released. In the event the Operations Department ran ahead of the legal advice, but I do not think that it can be inferred from this that the relevant directing minds at Depfa were unconcerned as to what the legal advice would be. It must also be borne in mind that no-one at Depfa, not even Mr Witmeur who was closest to the customer, knew of the reason why Narvik sought the restructuring. The restructuring did not substantially alter the nature of the original transaction – Depfa paid out an extra, relatively small, lump sum in return for an extra and compensating margin.

Restitution – change of position

162. As between the municipalities and Depfa therefore there remains only for consideration whether the municipalities can successfully rely upon what they say is their change of position in good faith on the strength of the payments received from Depfa. The existence of this defence was finally recognised in Lipkin Gorman v Karpnale [1991] 2 AC 548. It is simply an aspect of the principle of unjust enrichment. Explaining why the defence can sometimes be available, Lord Goff said, at page 579-580:

"In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, 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, the injustice of requiring him so to repay outweighs the injustice denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. Likewise, on facts such as those in the present case, if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received. In other words, bona fide change of position should of itself be a good defence in cases such as these.

… At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions."

In Niru Battery Manufacturing Co v Milestone Trading Ltd [2004] QB 985 Clarke LJ stated the essential question, at page 1003, to be "whether on the facts of a particular case it would in all the circumstances be inequitable or unconscionable, and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer".

163. Mr Milligan submits that the municipalities changed their position by using the amount advanced to purchase first the CLNs and then in due course the CDOs. In my judgment the use of the funds in this way neither amounted to a change of position in the sense in which this expression is used in the authorities nor rendered it inequitable in all the circumstances to require the municipalities to make restitution. The short point is that it is not inequitable to require the municipalities to take the risk of the investment turning out badly. The municipalities knew that irrespective of the outcome of the investments they would have to repay the loans. However the "swaps" might be characterised in law, the municipalities knew from the start that the amounts advanced by Depfa were to be repaid. This is as it seems to me completely fatal to the defence of change of position. The case is far removed from that where the recipient of what he reasonably believes is an out and out payment to him pays that amount away to charity. Here the municipalities always knew that they had to repay the money, first by a series of quarterly repayments and then ultimately by a bullet repayment at the end of the loan period. In investing the money as they did they plainly assumed the risk of the success of the investment. Indeed as Mr Railton points out the whole rationale from the municipalities' perspective of their entering into the swaps was so that they could have the use of the sums advanced by Depfa for the period of the swaps. Insofar as they intended to look to the monies advanced as a source of repayment, they deliberately took the risk that the investments into which they entered would lead to a shortfall. I can see no basis upon which it can begin to be suggested that in these circumstances it would be inequitable to require the municipalities to make restitution. That would be to impose upon Depfa the risk of investments over which they were not consulted and over which they had no control.
164. The case is in my view indistinguishable from that considered by the Privy Council in Goss v Chilcott [1996] AC 788. The defendants, Mr and Mrs Goss, had been granted a loan by the claimant finance company under a mortgage instrument that had been avoided by the claimant because it had been fraudulently altered by Mr Haddon, an employee of the claimant, without the claimant's authority. Mr Haddon was the brother of Mrs Goss. The advance from the claimant having been made available to Mr and Mrs Goss, it was as agreed between them and Mr Haddon in fact received by Mr Haddon. Mr and Mrs Goss took no security from Mr Haddon. Mr Haddon was unable to repay the advance. Mr and Mrs Goss argued that their inability to recover the money from Mr Haddon constituted a defence of change of position to the claimant's action for restitution of the money paid for a consideration that had totally failed. It was held by the Privy Council that that defence failed because Mr and Mrs Goss knew that the money lent would have to be repaid to the claimant and, in paying it to Mr Haddon, they had taken the risk that the loss would fall on them. Lord Goff, giving the judgment of the Board, said, at page 799:

"From the beginning, the Defendants were under an obligation to repay the advance once it had been paid to them or to their order; and this obligation was of course unaffected by the fact that they had allowed the money to be paid over to Mr Haddon. The effect of the alteration of the mortgage instrument was that their contractual obligation to repay the money was discharged; but they had nevertheless been enriched by the receipt of the money, and prima facie were liable in restitution to restore it. They had however allowed the money to be paid over 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, in which event they themselves would have to repay it without recourse to him. Since any action by them against Mr Haddon would now be fruitless they are seeking, by invoking the defence of change of position, to shift that loss onto the company. This, in their Lordships' opinion, they cannot do. The fact that they 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."

165. Mr Railton submits that the position of the defendants in Goss v Chilcott is indistinguishable from the position of the municipalities. They knew that the monies received from Depfa would have to be repaid. If the loans were valid, as the municipalities had thought they were, they would have been contractually obliged to repay irrespective of their failed investments. By being required to make restitution, they are no worse off than they would have been had the loans been valid. The fact of the invalidity of the loans means that the legal basis for repayment is unjust enrichment rather than contract, but that there should be an obligation to "repay" is what was always assumed to be the case. As Hobhouse J put it in Westdeutsche [1994] 4 All ER 890, at 952: "the only change in the position of the Defendant was that the legal basis for the liability to make the payment was different from that which it had assumed…". I entirely agree with Mr Railton's submission.
166. Mr Milligan suggests that this approach is wrong for three reasons. First, he submits that it fails to address the principal reason for which the swaps were invalid, namely, to protect the taxpayers from the consequence of the municipalities borrowing to invest in financial markets. Mr Milligan submits that if the defence of change of position is not available this defeats the very purpose for which the swaps were invalid. In fact I think that the prohibition is on loans which will have to be repaid in future budgetary periods. However that may be, the point is in my judgment misconceived. As Lord Goff pointed out in the Westdeutsche case, [1996] AC 669 at 688, 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 available restitutionary defences.
167. Next Mr Milligan submits that, unlike in Goss, Depfa was aware that it was taking the risk. This is in my judgment not so, as I have already explained. If it were, the current question would not arise.
168. Finally, Mr Milligan submits that if the municipalities are obliged to make restitution of the sum which they received from Depfa, without taking account of their losses, the municipalities would be even worse off than if they had been bound by the swaps, because they would be deprived of the opportunity to spread their repayments over a period of years. This is a strange argument. The municipalities did not have to take the point as against Depfa that they lacked capacity to enter into the loans. They have deprived themselves of the opportunity to spread their repayments over a period of years. In any event they ignore the terms of the agreements of which they have been relieved.
169. For all these reasons the defence of change of position must in my view fail. I am glad to be able to reach this conclusion. 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. This is not one of those "comparatively rare occasions" on which the defence is likely to be available.

Estoppel and negligent misstatement

170. At paragraph 35 above I set out the representations which are attributed to Haugesund in the ISDA Master Agreement. Precisely the same representations appear in the Narvik agreement. Wikborg Rein contends that these representations form the basis of an estoppel by representation pursuant to which the municipalities are, as against Depfa, precluded from denying that the swap agreements imposed on them valid and binding obligations. In the alternative, Wikborg Rein contend that the municipalities owed to Depfa a tortious duty of care in making the representations as to their power to enter into the agreements and that they made the misstatements negligently, so that in consequence Depfa has a cross-claim in damages against the municipalities to the extent of its inability to recover in contract or in restitution.
171. By late amendment to its pleadings Depfa adopted these arguments as against the municipalities, it being contended by Wikborg Rein that if they did not take these points then they were to be regarded as the authors of their own loss. In relation to the first issue Depfa did not adduce any evidence to the effect that it relied upon the representations apparently made by the municipalities. Depfa did somewhat half-heartedly plead that although it relied primarily upon Wikborg Rein's advice in entering into the original and amended swaps and making payment pursuant thereto, it did also rely upon the representations in that had Haugesund and Narvik refused to make the same it would not have proceeded with the transaction. That is not a convincing plea of reliance.
172. Both of these arguments must in my view fail on the simple ground pointed out by Professor Graver that "there can be no power under administrative law for public bodies themselves to create new powers by representing that they have such powers". Unsurprisingly Professor Graver's evidence was not challenged. Mr Mitchell distinguishes between a power to enter into a contract and the power to make a statement independently of contract. I agree that the concepts are different, although the representation here is made in connection with the making of the contract and, insofar as negligent misstatement is concerned, liability is only established if there is a relationship "equivalent to contract" – cf per Lord Devlin in Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465 at 530. However the answer to Mr Mitchell's point is given by Professor Graver. It was given too by Harman J in Rhyl UDC v Rhyl Amusements Ltd [1959] 1 WLR 465 at pages 474-475 where he pointed out that arguments of this sort which might avail against "private people" cannot prevail as an answer to a claim that something has been done by a statutory body without it having the capacity so to do.

Conclusion and other matters

173. I understand the parties to be hopeful of agreement as to the financial outcome as between the municipalities and Depfa if, as I have found, the municipalities lacked capacity to enter into the loan agreements but Depfa is entitled to a restitutionary remedy. If agreement cannot be reached, I shall have to give directions as to how the figure is to be determined.
174. As between Depfa and Wikborg Rein it was suggested at the hearing that matters of quantification of damages should be left for determination after the primary issues of liability had been resolved, and I agree that this is sensible. I received detailed written argument on a number of issues of principle, and these were also addressed, albeit for the most part briefly, in oral argument. There was pressure of time to complete oral submissions. One point on which I indicated that I would, if it arose, allow the parties to make further submissions and if necessary seek leave to amend was contributory negligence. After the conclusion of the hearing the solicitors for Wikborg Rein wrote inviting me to defer consideration of all questions of quantum as between Depfa and Wikborg Rein, in which they included questions of causation and contributory negligence as well as quantification. They pointed to the fact that the time estimate for the case had proved insufficient and emphasised the pressure of time under which their clients had had both to prepare written submissions and to deliver oral submissions. Similarly, after the end of the hearing the solicitors for Depfa supplied me with a copy of the decision of Colman J in National Westminster Bank plc v Rabobank Nederland [2007] EWHC 1742 (Comm) in which consideration was given to the recoverability of costs as damages. Wikborg Rein have not addressed complete submissions to me on this point, and have not as yet responded to the reliance upon the decision of Colman J, or, more accurately, upon the authorities considered in his judgment. I would in any event wish to defer until after determination of the incidence of costs both as between the municipalities and Depfa and as between Depfa and Wikborg Rein the question whether and to what extent Depfa may recover as damages from Wikborg Rein any of their costs incurred as against the municipalities insofar as the same may for whatever reason be irrecoverable against those parties. It is right to record that Wikborg Rein found themselves impleaded in proceedings in which an expedited trial was ordered only six days after they had been served. I have some sympathy with their position. Moreover they gave every co-operation in ensuring that the trial date could be met and could be effective.
175. On the basis of my findings the question of contributory negligence does not I think arise. However in the circumstances I do not think that I should deny to Wikborg Rein the opportunity, if so advised, to seek to persuade me that it does.
176. I am less clear whether the parties' interests are best served by my deferring a decision on causation and/or the scope of the duty assumed by Wikborg Rein to Depfa. As I understand it the argument which Wikborg Rein wishes to run is that Depfa's loss, insofar as it has sustained loss over and above that which it can recover in restitution, has been caused not by Wikborg Rein's breach of duty but by the disastrous performances of the CDOs and/or by the decisions of the Regional Commissioner of Rogaland and the Chief Administrative Officer of Nordland to annul the resolutions of Haugesund and Narvik, thereby ultimately causing the investments to be redeemed.
177. As to the latter point, the decisions of the two County Governors as they were sometimes called require close examination, as adumbrated in paragraphs 41 and 65 above.
178. So far as concerns the Rogaland decision, I do not believe that the Regional Commissioner annulled the decision of the Haugesund municipal council to enter into the "swap" transaction. The decision letter draws a distinction between the legality of the zero coupon swap and the grounds upon which the decision to invest the proceeds thereof can be impugned. As to the former, the Regional Commissioner was asked by the Ministry not to consider whether the decision fell foul of section 50, as Professor Graver confirmed when the decision letter was shown to him in cross-examination. The Regional Commissioner did not do so. As I read his decision, which was however never properly examined at trial, exercising his powers of review of legality under section 59 of the Local Government Act, he concluded that:

i) The decision to invest in a CLN should be annulled because (a) the Chief Executive of Haugesund had failed to observe the due diligence required by section 23 of the Local Government Act when presenting the matter to the Council, and (b) in breach of section 17 of the Administration Act (which I have not seen) there had been a failure to consult an independent external expert as to the risk involved in the decision; and

ii) The decision to invest in a CDO should be annulled because it was reached in contravention of section 52.3 of the Local Government Act which provides that the municipalities must administer, here relevantly invest, their funds without the entailment of significant financial risk.

It will be apparent from my analysis that I have assumed that the Regional Commissioner had competence to annul a resolution in part, since the decision to invest in a CLN is of course contained within the same resolution whereby it was resolved to enter into the swap. Finally, Haugesund was not expressly directed to sell the CDO, but that direction was I think implicit in the Regional Commissioner expressing "no objection to the municipality [using] a reasonable period of time to dispose of the bond".

179. The decision of the Nordland Chief Administrative Officer was not so far as I can recall or trace analysed at trial. The starting point is again that the Ministry appears to have asked the Chief Administrative Officer to proceed upon the basis that "financial sales of concession power" are not to be regarded as loans within section 50. The Chief Administrative Officer recites that he takes this as the basis for his examination and does not formulate any conclusions of his own in this regard. The decision letter then proceeds to examine various resolutions, including that of 1 July 2004 to which I referred at paragraph 48 above and with which I am not immediately concerned. When he came in section 2.2 of his decision letter to deal with the resolution of 30 June 2005, the Chief Administrative Officer reiterated that the zero coupon swap enabled thereby was not to be regarded as a loan. On the other hand he concluded, as he had in relation to the 1 July 2004 resolution, that the zero coupon swap was a sale of future revenue and as such contrary to section 54 of the Local Government Act pursuant to which "a local authority's claims for taxes and levies may not be assigned". It will be apparent from my analysis set out earlier in this judgment that I do not, with all due respect, consider that this was a correct conclusion. The revenue stream was neither sold nor assigned. Nonetheless, that was the decision of the Chief Administrative Officer, and my views as to its correctness are for present purposes irrelevant. As I read his decision the Chief Administrative Officer then annulled the resolution of 30 June 2005 in its entirety on this ground. He annulled the subsequent decision to invest in a CDO as reached contrary to section 52.3 of the Local Government Act. He dealt entirely separately with the decision to enter into an amended zero coupon swap whereby the margin was increased in order to produce an additional NOK 5.7 million. He regarded this as not lawful since contrary to section 50 of the Act, and annulled it on this ground. Although I have already pointed out that I do not agree with the sale or assignment analysis, the Chief Administrative Officer was of course, with respect, entirely correct not to regard the decision to take a further advance of NOK 5.7 million as covered by the Ministry's view that "financial sales of concession power" are not to be regarded as a loan. Narvik was directed to sell the CDO.
180. The upshot is as far as I can see that the resolution by Haugesund to enter into the zero coupon swap has not been annulled. On the other hand, if I am correct in my interpretation, both the resolution by Narvik to enter into the original zero coupon swap and its resolution to enter into the amended or restructured zero coupon swap have been annulled, albeit only the latter on grounds of lack of capacity.
181. Not having heard sustained or detailed argument on the effect of these administrative decisions, I have concluded with some reluctance that I should permit Wikborg Rein an opportunity further to develop their argument on causation and the related question of the scope of the duty assumed by them in advising Depfa. It is nonetheless I think appropriate that I should record my preliminary view that the loss to Depfa has been caused by the circumstance that the municipalities lacked the capacity to enter into the loans, whether in their original or their amended forms. That is the very question on which Wikborg Rein was asked to advise, although for the reasons which I have already discussed the question on which Mr Rasmussen concentrated was the logically anterior question whether the swaps were prohibited loans. To the extent that Depfa cannot recover from the municipalities the amounts it has advanced in reliance upon Wikborg Rein's advice, it would in my judgment be surprising if Wikborg Rein can escape liability. The municipalities were not constrained by their agreements with Depfa as to the manner in which they used the amounts advanced, and the performance of the investments into which they entered seems to me irrelevant to the analysis. The failure of the investments has merely provided the occasion for the municipalities to rely upon their lack of capacity. So too for the moment I cannot see the relevance of the circumstance that the original Narvik resolution was subsequently annulled on a ground unrelated to capacity. In answer to Depfa's claim Narvik has relied upon its lack of capacity. Depfa suffered a loss by advancing money to entities which, contrary to Wikborg Rein's advice, had no capacity to enter into an agreement to borrow and repay that money. However it may be that I have misunderstood the argument and I reserve final judgment on it.
182. It follows that the municipalities are in principle entitled to declaratory relief to the effect that they are not bound by the swap transactions, but this is a Pyrrhic victory. There will be judgment for Depfa against each of the municipalities in whatever is in each case the agreed amount, or if it cannot be agreed, for damages to be assessed together with directions as to the manner of assessment. As between Depfa and Wikborg Rein I will hear Counsel on the appropriate form of order to be made at this stage.