When even judges don't understand the law
Next time your lawyer puts the deal on hold, refrain from calling him uncommercial. By Christopher Stoakes.
Competition is so intense these days that lawyers in private practice have learnt by heart that their job is to help the client achieve his objectives. So when a lawyer advises you not to proceed with a tran saction, give him the chance to argue the point.
What has prompted this reflection is the realization that, after almost 15 years, the Hammersmith & Fulham swaps litigation is still going on. For bankers not around then, the cases arose out of interest-rate swaps that UK local authorities entered into in the early 1980s. They did so as part of complex financing arrangements designed to overcome central government borrowing caps.
The problem was that local authorities are statutory bodies. They owe their existence to enabling legislation, which defines what they can and cannot do. The courts held that they lacked the power to enter into interest-rate swaps - in the jargon, the swaps were ultra vires the local authorities.
Bankers still seethe at the memory. At the time, local authorities seemed the perfect credit risk, unable (in theory) to go bust. Banks rushed to do business with them. It would have been a brave lawyer who stood in the way, although no doubt there were some who had the hollow satisfaction of being proved right when, in the 1992 case of Hazell v Hammersmith & Fulham London Borough Council, the House of Lords confirmed that entering into swaps lay beyond their powers.