Accordingly, the decision of the House of Lords declaring such practices to be unlawful set off a torrent of collateral litigation unwinding such swaps.

[3] Up until the early 1990s, a number of local authorities had been engaged in interest rate swap transactions as part of managing their debt portfolios.

In connection with that borrowing, certain local authorities sought to enter into swap transactions to hedge their exposure to fluctuations in interest rates.

There were some doubts as to the ability of local authorities to enter into such transactions, but the local authorities sought the opinion of Anthony Scrivener QC, a leading commercial silk, who had advised that if a "rate swap is undertaken as part of the proper management of the council's fund then ... the swap will be intra vires" [i.e. within the powers of the council].

[4] Whilst most local authorities engaged in swap transactions on a prudent scale to manage their debt portfolios, the position of Hammersmith and Fulham LBC was different.

Those local authorities which had entered into the swaps market in a more responsible manner, with a view to the more effective management of their debt portfolio, were not represented in the proceedings and so their voice was never heard.

The excessive nature of Hammersmith's involvement in the swaps market may have coloured the perception of the courts ...In his 2008 book, Follow The Money,[6] Duncan Campbell Smith paints a dramatic picture of the moments before the litigation commenced, with the slowly dawning realisation developing amongst the principals that somehow a very left-wing London borough council has managed to accumulate an extraordinarily large swaps exposure to the various banks simply to be able to collect and spend the premiums for entering into the trades.

[citation needed][a] In addition to being upset at the choice of Hammersmith (rather than a council which had made more responsible use of interest rate swaps), the various banks were also reported[by whom?]

[citation needed] Recognising the importance of the point, the case was heard by two judges at first instance in a divisional court, Woolf LJ and French J.

[8] It was noted, with no small sense of irony, that "the decision had the bizarre effect of 'benefiting the chief culprit' (Hammersmith), while hurting the more prudent local authorities.

He sought to explore whether the "replace" and "re-profile" swaps could be said to be "calculated to facilitate" or were "conducive to" the power of the local authorities to borrow under section 111 of the statute.

This only applies to a corporation created by exercise of the royal prerogative (Riche v Ashbury Railway Carriage and Iron Co (1874) LR 9 Ex 224 at 263).

[19] Having entered into transactions with local authorities in good faith, the banks now found themselves embroiled in costly litigation to unwind hundreds of financial contracts at great expense.

The reaction of the local authorities is reported to have been mixed; whilst many councils were relieved of potentially large liabilities, their officials had nonetheless effectively been found to have engaged in unlawful conduct.