Islington Council is celebrating a landmark House of Lords victory over interest swaps which will see it receive a refund of about £500,000.
The Lords last month overturned a 1993 High Court judgment which forced the council to pay compound interest on money received under a swaps agreement with Westdeutsche Landesbank. The ruling said that only simple interest – considerably less than compound interest – should have been paid and Islington will now get a refund from Westdeutsche.
Marie Rosenthal, Islington's head of law, said the case would have major ramifications in the commercial world. "From a legal point of view, today's decision, which overturns a long-standing precedent, will have a profound effect on the way the business world operates."
Local authority interest rate swaps were declared ultra vires by the House of Lords in 1991.
The judgment led to dozens of writs being issued as banks sued for the return of their money. Islington v Westdeutsche Landesbank was chosen as a test case.
The Commercial Court and High Court had both held that Islington should repay the money lent to it and also pay compound interest on the loan.
Katherine Dandy, of Nabarro Nathanson, acting for Islington, said: "Going to the High Court was a difficult decision to make. We knew the courts relied on a 1914 House of Lords decision and we were hoping that by taking it to the House of Lords, the Lords would be willing to look at the judgment again."