Two recent decisions on ultra vires activities by local authorities have caused further shock waves in the already nervous world of local government finance.

Bankers, brokers and local authorities are writing obituaries on the private finance initiative (PFI) and any innovative capital activity in the local authority market.

On 8 May, Credit Suisse lost its appeal in Credit Suisse v Borough Council of Allerdale (see [1996] The Times, 20 May) and the Court of Appeal reversed Credit Suisse v The London Borough of Waltham Forest (see [1996] The Times, 20 May), following an appeal by the local authority.

The courts have confirmed that banks, companies and anyone else doing business with local government run the risk that several years after a bargain has been struck, their local authority 'partner' can play the ultra vires card and avoid obligations freely entered into, once they become onerous.

In both cases the court held that because a guarantee given by a local authority to Credit Suisse was ultra vires the bank could not enforce it.

Each judgment confirmed that local authorities only have those powers which Parliament has bestowed upon them.

They must act legally within their statutory functions, must not use subsidiary or general powers to circumvent capital or other controls and, if they act in circumstances subsequently judged to be outside their legal capacity, the transaction will be void and unenforceable.

In addition, the courts interpret local authority legislation narrowly and there is a belief that while it may not be morally acceptable behaviour, it is legally acceptable for local authorities to argue that their own bargains - freely entered into - were ultra vires.

In this context, the anger felt towards some local authorities and the distrust of the market by those who historically saw to local government as a low-risk partner is understandable.

As well as causing consternation amongst banks and third parties, these cases have added to the problems for lawyers in local government or those advising local authorities.

It would be convenient to argue that these cases can properly be confined to their facts and placed in their historical context in the same way as Hazell v Hammersmith LBC [1992] AC 1 in which interest rate swaps were held ultra vires.

However, this argument is not fully sustainable; there is at least one case (R v Richmond upon Thames LBC, ex p McCarthy & Stone (Developments) Ltd [1992] 2 AC 48) where the House of Lords decided that a local authority could not carry out a perfectly laudable activity to charge potential applicants for planning consents - because there was no power so to do.

In a climate where litigation against professional advisers is increasingly commonplace, it is unrealistic to expect any professional to be unaware of the risk of being sued if there is a subsequent loss, particularly where the lawyer's whole career may be at stake.

It is likely that advisers will err on the side of caution, even though the level of risk for their project may be very different to that taken by Allerdale and Waltham Forest, and these cases do no more than re-state existing law.

However, it is still possible for local authorities to carry out some innovative initiatives.

There are a number of important legislative provisions, such as pt III of the Local Government and Housing Act 1989 (promotion a economic development) where local authorities do have wide powers to act innovatively.

By using their powers to dispose of property at an undervalue either with the benefit of the General Disposal Consent Act 1995 or by seeking a specific consent, local authorities can enable other funds to be accessed - eg lottery, Sports Council or regeneration funds.

It is doubtful whether schemes such as Allerdale's speculation on the property market or Hammersmith's on the money markets were ever appropriate activities for local authorities.

What is unfortunate is that a number of reputable local authority schemes have been and will be struck down because of the backlash from cases such as these.

Nevertheless, there is a future for local government schemes.

Authorities should seek partnerships that would achieve worthwhile objectives within the existing law while lobbying for wider powers that will enable third parties to feel secure that local authority bargains cannot be struck down.

I question whether any political party would feel comfortable greatly extending local authorities' powers unless it was satisfied that local government had grown up and would behave in a reputable manner.

Changes in the law would need primary legislation and could be achieved either by a power of general competence or by introducing a provision into local government law validating an ultra vires act in favour of a non-local authority party (similar to ss 35-35B of the Companies Act 1985).

Another solution would be for legislation to empower an independent panel to screen and approve schemes and give them a vires health check.

Once a scheme had been through this process, the parties could not dispute the vires and the courts would have no jurisdiction to intervene.

All of these proposals raise difficult public law and moral issues and are a reflection of the genuine need for new law if local authorities are to be enabled to enter into wide-ranging innovative schemes.