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Ultra vires and capacity

22 October 2014

Relevant Case Law

In Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), Credit Suisse International brought an action for default under an International Swaps and Derivatives Association Agreement.

The common law applied in this case as Stichting, being a limited liability foundation under Dutch law, did not fall within the definition of a company for the purposes of the Companies Act 2006.

The agreement was comprised of several transactions. It was held that three of the transactions in dispute were beyond the capacity of the defendant to enter into and were therefore invalid.

Smith J applied the strict common law approach to capacity, stating that: ‘‘At common law, if a corporation purports to make a contract that is outside its capacity, it is void ab initio, and cannot be ratified.’’

This did not, however, negate the claimant’s ability to pursue damages as the defendant had given pre-transaction representations that entering into the agreement would not exceed its capacity.

In Haugesund & Narvik v Depfa Bank [2010] EWCA Civ 579, two Norwegian local authorities entered into a loan agreement with a bank, constructed in the form of SWAP deals.

The local authorities lacked the capacity to enter into the agreement and the Court of Appeal held that the loan agreements were void. The bank was left with no remedy.

In this case, no representations as to capacity had been given by the local authorities.

The reasoning in Stichting and Haugesund may be of particular interest to English local authorities, particularly in so far as they suggest that entities whose capacity is limited by statute or their constitutions could utilise the common law to avoid contracts to which they no longer wish to be a party.

This analysis was affirmed in Hazell v Hammersmith [1992] 2 AC 1, which nullified interest rate SWAP agreements entered into by several local authorities with a number of banks.

The agreements were held to be beyond the power given to local authorities by Parliament and thus ultra vires and void.

Extra care should, therefore, be taken to check the constitution of these entities prior to any transaction as any lack of capacity would appear to give them a licence to avoid contracts entered into ultra vires and escape their obligations, at a time of their choosing. 

This article was written by David Hirschman.

For more information contact David on +44 (0)20 7203 5289 or david.hirschman@crsblaw.com