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Bankers might be forgiven for thinking that when lawyers get their teeth into a juicy case they make it run and run. But, warns Christopher Stoakes, we have still to hear the last of the swaps cases

Bankers thinking the UK municipality swaps debacle of the 1980s is behind them can think again. A recent House of Lords case has managed to extract more mileage from it, and create legal history. The case, Kleinwort Benson v Lincoln County Council, has reversed a 200-year old legal principle that "ignorance of the law is no excuse", quoted by lawyers as "ignorantia non excusat lex". Under this principle, a party is unable to claim in his defence that he misunderstood or overlooked a statute or case. As a matter of public policy, this is rightly regarded as correct. However, what happens if the law is in flux?

This was the question raised by the Kleinwort Benson case, decided at the end of last year. The bank had made payments under interest rate swaps that subsequently turned out to be void because the counterparties - UK local authorities (ie, public municipalities) - lacked legal capacity to enter into contracts of that nature. This was the effect of Hazell v Hammersmith & Fulham which was decided in 1992.

By then, the bank had made payments to four local authorities under different swap arrangements and these payments had been regarded by all concerned as validly made.

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