“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 bysection 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.”
“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 to1 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 of28 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. …”
“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.”
“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.”
“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.”
“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 dated20 September 2002 to fall outside the provisions of the Act on borrowing.”
“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.”
“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.”
“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.”
“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.”
“Local Government Act section 50 In a letter dated20 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 of20 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.”
“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.”
“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’.”
“(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.”
“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.”
“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.”
“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.”
“… 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.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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 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.”
“The House of Lords in its ruling of24 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.”
“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.”
“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.”
“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.”
“GOOD FAITH – A Study of the Requirement of Good Faith as a Condition for Acquisition or Enforcement of Private Rights”
“such individual pluralism will almost lead to anarchy”
“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.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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?”
“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.”
“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.”
“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…”