ABSTRACT
In Westdeutsche Landesbank v Islington (1996) a local authority had entered into a contract with a bank whereby the bank paid £2.5 million to the local authority subject to an obligation on the local authority to repay that money over time. The terms of the contract are too complex to be worthy of discussion here. They related to a complex financial product known as an interest rate swap. The interested reader might wish to consult either Hudson (1998) or Hudson (1999) for detailed examinations of these areas of international finance. The contract between the local authority and the bank was due to last for ten years but after five years another high profile case informed the parties that their contract had been void ab initio (that is, the contract had never been validly made) because it was beyond the powers of the local authority to enter into it. By this time the local authority had spent the money transferred to it by the bank. The bank wished to recover its money and also to recover compound interest on that money. Compound interest is a higher effective rate of interest than simple interest because it would have entitled the bank to recover interest on the interest payments as well as on the capital payments owed to it by the local authority. However, it was held by the House of Lords that such compound interest would only have been available to the bank if the bank could have demonstrated that it had retained some proprietary right in the money which it had transferred to the local authority at the beginning of the contract.
