“Municipal Purposes”: the Return of Vires Litigation

KEY POINTS Feature Thevires of a local authority in connection with commercial transactions remains a potential pitfall for commercial lenders. When entering into transactions with local authorities, commercial lenders will be well- LITIGATION advised to ensure that their due diligence includes consideration of the powers pursuant to which the local authority is purporting to act. Parties cannot rely on courts adopting a broad, purposive approach to construction of VIRES legislation granting local authorities the power to act. Ambiguity in such legislation may not be resolved in favour of an intra vires construction. Author Joseph Sullivan “Municipal purposes”: the return of vires litigation In this article, Joseph Sullivan considers a recent Privy Council decision which PRIVY COUNCIL serves as an important reminder of the need for pre-contractual checks as to local authorities’ vires before seeking financial assistance from them. Argument In the appeal before the Privy Council, MIF “MUNICIPAL PURPOSES”: THE RETURN OF OF RETURN THE PURPOSES”: “MUNICIPAL argued that the phrase “municipal purposes, INTRODUCTION on the guarantee. The Corporation refused being purposes of an extraordinary nature” In Mexico Infrastructure Finance payment, arguing that the guarantee was ultra must be given a broad construction. n LLC v The Corporation of Hamilton, vires and unenforceable. This defence was It submitted that: the Privy Council held, 3-2, that the grant allowed at first instance and in the Court of The phrase clearly envisaged activities by the Corporation of Hamilton of a Appeal for Bermuda. out of the ordinary run, since it referred guarantee to support borrowing by a private to purposes of an “extraordinary nature”, developer was ultra vires and, accordingly, THE POWER and it expressly required ministerial unenforceable. The case concerned the There was no express power to issue control and approval. construction of the term “municipal guarantees in the legislation by which the The word “municipal” reflected two purposes” in the relevant legislation. Corporation was created: if there was any matters: a geographical component The majority adopted a narrow construction, such power, it had to be implied from other in the Corporation’s powers (the City holding that the term was limited to provisions. Section 23(1) of the 1923 Act limits of Hamilton) and a local-interests activities by which residents were provided gave the Corporation the power to levy rates component (the purpose must be in with a direct benefit. The dissenters adopted for specific purposes, one of which (set out the interests of the locality and its a broader construction, holding that the in sub-s (f)), was, “such municipal purposes, inhabitants). term included any action taken for the direct being purposes of an extraordinary nature, or indirect benefit of residents. as the Minister may in any particular Whilst MIF acknowledged that the case approve”. luxury hotel was not intended to be used BACKGROUND by the inhabitants of Hamilton, it argued In 2012, the Corporation of Hamilton FIRST INSTANCE that it was of benefit to them since it would entered into an agreement with a private At first instance, Hellman J held that the attract tourists and create associated needs developer, PLV, for the construction of a issuing of the guarantee by the Corporation for related services which inhabitants could five-star hotel complex. It was intended that to MIF did not fall within the scope of the provide for reward. It pointed out that the the hotel would boost tourism in Hamilton purpose set out in s 23(1)(f) of the 1923 Corporation owned a theatre which provided and would provide enhanced revenues for Act because it was not a service provided performances not just for the inhabitants associated service providers in the area. The by the Corporation to its ratepayers, even of Hamilton but also for visitors: no one Corporation would also receive rental income though it may have been of benefit to them. suggested that the building of the theatre from the hotel operator and income from the Accordingly, the guarantee was ultra vires. was ultra vires. use of a car park built as part of the complex. The Corporation argued that “municipal PLV obtained a bridging loan of $18m COURT OF APPEAL purposes” corresponds to governmental from Mexico Infrastructure Finance LLC The Court of Appeal for Bermuda agreed functions and largely involve the provision (MIF) in connection with the development. with Hellman J’s decision. It held that a of “necessaries”, in contradistinction to The Corporation provided MIF with a development carried out by the Corporation “luxuries”. It relied on the local authority guarantee in respect of that loan, purportedly which was of benefit to the entirety of interest rate swaps case of Hazell v pursuant to a power under s 23(1)(f) of the Bermuda would be ultra vires as it would not Hammersmith and Fulham LBC in support Municipalities Act 1923 of Bermuda (1923 relate to the functions of the local government of its argument that, in order for a purpose Act). When PLV defaulted, the lender called of the city of Hamilton. to be a lawful purpose for a local authority, 256 April 2019 Butterworths Journal of International Banking and Financial Law “MUNICIPAL PURPOSES”: THE RETURN OF OF RETURN THE PURPOSES”: “MUNICIPAL Biog box Joseph Sullivan ia a barrister at Quadrant Chambers. Feature Email: [email protected] https://www.quadrantchambers.com/barristers/profile/joseph-sullivan it is not sufficient that the proposed action is in principle why in an appropriate case the which was the perceived vice of the swap convenient or desirable or profitable. On the provision of services should not be indirect, transactions which were held to be ultra vires facts, the hotel was designed to satisfy the rather than direct, there is a distinction in Hazell. The issuing of a guarantee to assist needs of affluent travellers rather than local between a service provided partly for a development thought to be in the broader inhabitants and, accordingly, the provision inhabitants and partly for visitors, such as the economic interest of the city was not a free- of the guarantee was not a “municipal theatre, and a service provided exclusively for standing business activity. purpose” within the meaning of s 23(1)(f) of visitors, such as the hotel. Whilst provision the 1923 Act. of the former type of service might fall within DISCUSSION the Corporation’s legitimate objects, the latter This decision is something of a throwback VIRES Majority decision would not. to the local authority swaps litigation of the LITIGATION Lady Arden, with whom Lords Reed and On the facts, they held that it was clear 1980s/90s. Commercial lenders may have Briggs agreed, gave the opinion of the that the guarantee fell outside the scope of the been forgiven for assuming that the prospect majority of the board. After dismissing, in Corporation’s purposes: it was no part of its of transactions being avoided by local short order, an argument that the power role to act as banker to a developer. authorities on the basis of vires arguments was could be implied as being reasonably a thing of the past, but this case demonstrates incidental to the Corporation’s power to Dissent that it remains an important issue which dispose of its interest in land, Lady Arden Lords Sumption and Lloyd-Jones dissented should form part of a lender’s due diligence went on to consider the central issue in in the decision. Lord Sumption gave the when entering into such transactions. the appeal: the meaning of s 23(1)(f) of the minority opinion in brief form. He set out The outcome of the appeal demonstrates 1923 Act. She held that the two-part test two reasons for disagreement with the that the courts may be prepared to take a for “municipal” put forward by MIF was majority: strict approach to construing legislation by unsatisfactory: He held that “municipal purposes” which local authorities are given power to act. The geographical component throws are purposes calculated to benefit the Whilst the dissenting opinion demonstrates a little or no light on whether the purpose current and future residents, permanent more generous, purposive approach (perhaps of the act is authorised or not. or temporary, of Hamilton in their in recognition of the unfairness of permitting The local interest component did not capacity as such. That is the relevant the Corporation to escape a liability its properly reflect the limiting role of the limitation and there is no justification councillors had willingly purported to enter word “municipal”. The word must, in for distinguishing between benefits into on its behalf), the majority opinion is the case of a body with rate-levying consisting in the direct provision of rooted firmly in a textual approach to the powers, be interpreted by reference to services or facilities to residents and construction exercise. its context and, here, the context is an expenditure on the promotion of the The practical result may simply be to authority which was established in order city’s economic development which increase transaction costs by reinvigorating a to benefit the inhabitants within the benefits the residents less directly. The further level of pre-contractual checks which limits of Hamilton. The Corporation test favoured by the majority gave rise may have fallen into abeyance. Commercial was not established to do an act simply to, “technical, functionally irrelevant and lenders may also require legislation expressly because it may promote the prosperity of barely workable distinctions”. to remove any doubt as to local authorities’ Hamilton and MIF’s construction would The natural meaning of the phrase vires before agreeing to provide them or deprive the word “municipal” of any “being purposes of an extraordinary associated private investors with financial relevant meaning: the word might just as nature” is that the expenditure in assistance, or alternatively may require well have been omitted since councillors question is expenditure of a kind which guarantees from central government.

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