Credit Suisse v Allerdale Borough Council

Facts

Allerdale Borough Council wished to develop a leisure and holiday complex. It set up a company wholly under its control to carry out the project and borrow the funds. Credit Suisse lent money to that company on the footing of a guarantee given by the council. The project failed and the bank called on the council to honour the guarantee. The council argued that it had no power to give the guarantee, so that the guarantee was void.

History

The bank sued the council in the High Court, which held the guarantee invalid, and the bank appealed to the Court of Appeal.

Issue

Whether the council had power to give the guarantee under the Local Government Act 1972, and if the guarantee was ultra vires, whether the bank could nevertheless recover its money from the council on another basis, such as restitution or estoppel.

Held

Appeal dismissed. The guarantee was ultra vires and void, and the bank had no alternative remedy that could achieve the same effect.

Ratio

• A local authority's power to do things calculated to facilitate or incidental to the discharge of its functions did not extend to giving a guarantee of a company's borrowing for a commercial project, and a contract made without power is void.
• A claimant cannot use restitutionary or estoppel claims to obtain, in substance, the benefit of an ultra vires contract, because that would undermine the statutory limits on the authority's powers.

Key reasoning

• Statutory bodies have only the powers given to them by statute, expressly or by necessary implication, and a general incidental power does not authorise a type of transaction that the statute has otherwise restricted.
• Where the transaction is invalid because of lack of power, a claim in restitution or on an estoppel cannot be allowed if it would give effect to the very bargain that the law holds void.
• The bank lent to the company, not to the council, so there was no straightforward transfer of benefit to the council on which a claim could be based.

Where it fits in the module

On the FHS topic of what happens if a contract is ultra vires, the case shows the orthodox rule that invalidity leaves the counterparty with limited remedies, and contrasts with the approach taken to restitution in Woolwich [1993] AC 70. The legislative response in the Local Government (Contracts) Act 1997 raised the question of whether the common law doctrine imposes an unfair risk on counterparties who dealt in good faith. The case is also relevant to later debates about the relationship between public law invalidity and private law remedies. Tutorial questions focus on the balance between the rule of law and the protection of private persons who rely on an authority's apparent power.

Criticisms

• The rule imposes the risk of the authority's lack of power on a lender who has no means of knowing the limit of that power, though the authority is the body responsible for staying within its powers.
• Refusing restitution protects the council from the consequences of its own unauthorised act, producing a windfall to the public body at the expense of the lender.
• The ultra vires doctrine, applied to commercial dealings, is out of step with the way companies and other private bodies are treated and frustrates reasonable commercial expectations.
• The approach treats the statutory limits as fixed and the counterparty as knowing the law, which ignores the practical difficulty of ascertaining the scope of local authority powers.