Thirty years of ultra vires: local authorities, national courts and the global derivatives markets

Between 1987 and 1989, Hammersmith and Fulham London Borough Council entered into nearly 600 derivatives transactions. In 1991, the House of Lords held that it lacked the capacity to do so and the contracts were therefore void. Taking this landmark litigation as its starting point, this article seeks to explain the persistence and evolution of the problem of ultra vires, as it has affected local authorities participating in the derivatives markets. Specifically, the article traces how the derivatives markets have transformed beyond recognition in terms of their size, complexity and global reach over the three decades since the Hammersmith litigation, and it explores the resulting changes in the ultra vires disputes which come before the English courts. The article goes on to examine in detail the recent ‘second wave’ of ultra vires decisions, involving public bodies from Norway, Holland and Italy, amongst others. The analysis demonstrates how the global nature of the contemporary financial markets has further complicated the ultra vires problem, generating novel and difficult questions for the English courts. The article concludes that this area of law now contains a significant contradiction, between the English courts’ market-minded approach on the one hand, and the harshness of the traditional doctrine of ultra vires on the other.