Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (COMM) | Fieldfisher
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Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (COMM)


United Kingdom

Structured swap transactions held ultra vires Dutch social housing association but claimant bank succeeds in establishing remedy for breach of undertaking.

Structured swap transactions held ultra vires Dutch social housing association but claimant bank succeeds in establishing remedy for breach of undertaking


In a recent case involving a series of interest rate derivative transactions entered into between Credit Suisse International ("Credit Suisse") and Stichting Vestia Groep ("Vestia"), a Dutch social housing association, the English High Court had to decide whether Credit Suisse was entitled to recover an amount of just over EUR 83 million as money due under an English-law governed 2002 ISDA Master Agreement (the "Master Agreement"), including a Credit Support Annex ("CSA").  Credit Suisse had served an early termination notice on Vestia after it failed to post collateral due under the CSA.  Vestia disputed the amount claimed on the basis that some of the transactions were outside its objects and ultra vires and that the Vestia personnel who had negotiated the transactions and signed the corresponding transaction confirmations lacked authority. Vestia also claimed that the early termination notice was invalid.  In the alternative to its claim for the close-out amount, Credit Suisse claimed damages for breach of undertakings given by Vestia in a "Management Certificate"(including undertakings about its capacity and the authority of relevant personnel) as well as damages for breach of representation made in the Master Agreement. 

The Transactions

The transactions comprised five vanilla interest rate swaps, three swaptions, two constant maturity swaps and a range accrual swap.  Vestia accepted that two of the five vanilla swaps were standalone and binding upon it but argued that the other three were ultra vires; one because Credit Suisse had the right to cancel it at zero cost and the other two because they formed part of more complex contracts involving other disputed transactions.   Credit Suisse contended that it had entered into the nine disputed transactions with Vestia in nine distinct contracts; that Vestia had capacity to make each of them; but that, if any of the disputed transactions was outside Vestia's capacity and was void, this did not affect the validity of any other transaction.

According to Vestia, there were five disputed contracts in total, comprised as follows:

i) a contract (the "First Contract") comprising a vanilla swap and a swaption exercisable by Credit Suisse;

ii) a contract (the "Second Contract") comprising a constant maturity swap, a vanilla swap and a swaption exercisable by Credit Suisse;

iii) a contract (the "Third Contract") comprising a cancellable swap (originally dealt as a vanilla swap but later amended at Vestia's request);

iv) a contract (the "Fourth Contract") comprising a constant maturity swap and a swaption exercisable by Credit Suisse; and

v) a contract (the "Fifth Contract") comprising a callable range accrual swap.

Vestia argued that:

  • The effect of the telephone exchanges between the parties (in which multiple transactions were dealt with simultaneously) was that each group comprised a single contract;

  • Even if the parties had concluded nine separate oral contracts, their arrangements were superseded by documentation, the effect of which was that the parties agreed to treat the transactions as being comprised in five separate contracts; and

  • The intention of the parties was that each transaction should be conditional upon the parties concluding the other transaction(s) in its group, and that if one transaction in a group was outside Vestia's capacity and so void, the parties were not bound by any other transaction in the group.

The First Contract

The Court accepted all three arguments.  It was persuaded by various factors, including the reference to the two transactions as a "trade" (singular), the fact that the swap and the swaption were agreed at the same time, the fact that the premium receivable under the swaption was to be utilised to reduce the fixed rate payable under the swap, the fact that, if Credit Suisse exercised the swaption, the floating rate interest legs would, if part of the same transaction, be netted out pursuant to Section 2(c) of the Master Agreement, the fact that the two transactions were coterminous  and for the same notional amount and the fact that the confirmation referenced a transaction (singular). The Court also made the point that a credit break provision contained within the confirmation was naturally to be interpreted as applying to both transactions as opposed to one or the other – which in itself supported the argument that they were in fact one contract.  The Court rejected Credit Suisse's argument that there was no established market practice concerning when one confirmation might be used for more than one transaction – and said that the documentation argument was based upon the wording of the documents and their natural meaning, and not upon market practice.  The Court concluded by saying that the swaption depended upon the swap being valid or, put another way, that the reduced fixed rate payable by Vestia under the swap was the consideration for it granting to Credit Suisse the swaption.          

The Second Contract

For similar reasons, the Court again accepted all three arguments, noting as before that early termination provisions contained within the confirmation were, absent language to the contrary, to be interpreted as applying to all three transactions together (which, as before, lent support to the argument that they formed one contract) and concluding that the intention of the parties was that all three should be mutually conditional.   

The Fourth Contract

Again the Court accepted all three arguments and was fortified in doing so by the previous course of dealings between the parties and by the fact that the Third and Fifth Contracts were documented individually – the inference being that those transactions were indeed intended as separate contracts.

The Court thus accepted Vestia's contention as to what contracts were made, being the five groups referred to above and the two undisputed transactions.         

Capacity and Authority Defences 

In view of the decision of the Court of Appeal in Haugesand Kommune v Depfa ACS Bank [2010] EWCA 579, the Court ruled that Dutch law (as the law of the place of Vestia's incorporation) was the applicable law to determine Vestia's capacity but English law (as the law of the Master Agreement) was the applicable law to determine the consequences of that incapacity.  Nevertheless, the Court was asked by Credit Suisse to consider the consequences of such incapacity under both sets of laws as Credit Suisse had indicated that it might wish to challenge the Haugesand case in a higher court. 

The Court's analysis of the various arguments as to capacity and authority, emanating as it does from Dutch law, is beyond the scope of this briefing.  In short, the Court ruled that Vestia had capacity to enter into the First and Third Contracts but that the Second, Fourth and Fifth Contracts were ultra vires and therefore, as a matter of English law (or Dutch law, if the question arose), unenforceable against Vestia.  The Court added that, under English law, the Second, Fourth and Fifth contracts would be considered to be void on the basis that they were made without authority.

The Master Agreement and the Management Certificate

Credit Suisse advanced alternative arguments based on (i) various representations made by Vestia in Section 3(a) of the Master Agreement; (ii) a management certificate attesting to Vestia's capacity and authority (the "Management Certificate") and covered by the representation given in Section 3(d) of the Master Agreement; and (iii) additional representations as to compliance and hedging made by Vestia in the Schedule to the Master Agreement.

The Court held that the Section 3(a) representations and the statements in the Management Certificate were of no help to Credit Suisse because they took effect as mere representations in relation to valid transactions – they did not assist in relation to ultra vires contracts.  The Court added that the representations in the Master Agreement and in the Management Certificate did not enable Credit Suisse to argue that Vestia was estopped from disputing that the ultra vires contracts were within its capacity or from disputing the authority of relevant Vestia personnel to make those contracts.  The statements in the additional representations section of the Schedule, by contrast, were couched as representations and warranties, and took effect as contractual undertakings as well as representations.  The additional representations were drafted as follows:

"[Vestia] hereby represents and warrants to [Credit Suisse] (which representations will be deemed to be repeated by [Vestia] on each date on which a Transactions [sic] is entered into) that:

(i)  [Vestia's] entry into and performance of its obligations under this Agreement and each Transaction hereunder is and will be in compliance with its articles of association (statuten), its financial rules (financieel statuut) and any other laws or regulations applicable to [Vestia] from time to time including, but not limited to, the [BBSH] (as the same may be amended, supplemented or replaced); and

(ii) [Vestia] is entering into each Transaction purely for the purpose of hedging its exposures and not for the purpose of speculation".     

The Court labelled these provisions the "compliance provision" and the "hedging provision" respectively.  Noting that both were poorly drafted, the Court nevertheless came to the conclusion that, on its face, the compliance provision connoted that Vestia warranted to Credit Suisse, in the Master Agreement itself, that it would be acting in compliance with its articles of association (and so within its capacity) when entering into transactions covered by the Master Agreement. The Court took a less robust view of the hedging provision but this did not affect its conclusion – namely that the compliance provision covered ultra vires transactions made under the Master Agreement.

The Court readily accepted that this did not mean that Vestia had expanded its capacity by promising that it had power to do something that it could not but it ruled that there seemed no reason why a legal entity should not, in a valid contract such as the Master Agreement, undertake to its counterparty that the contract would not be used as a vehicle for purported transactions that were invalid because they were outside its capacity.  The Court accordingly concluded that because Vestia was, in relation to the ultra vires contracts, in breach of both the compliance provision and the hedging provision, it was not open to Vestia to dispute its liability to Credit Suisse under the Master Agreement on the grounds that the ultra vires contracts were outside its capacity and so invalid.  Credit Suisse could therefore recover money due under the Master Agreement or alternatively damages for breach of warranties.  

The Notice Defence

The Court had two final issues to deal with – one relating to the validity of the early termination notice served by Credit Suisse upon Vestia and the other relating to the application of Section 2(a)(iii) of the Master Agreement.   

Validity of early termination notice

Vestia contended that, by the time Credit Suisse had served its early termination notice, Vestia's Exposure had fallen below the Threshold Amount - so it would be pointless to pay the Delivery Amount and moreover it was no longer in default. 

The Court rejected this argument, both as a general principle – the failure to pay had occurred and was continuing, so there was a very real Event of Default – and on the back of expert evidence to the effect that it was usual for dealers, for a variety of reasons including market and operational certainty, to insist on the provision of collateral in these circumstances.    

The Section 2(a)(iii) issue    

In its communications with Vestia, Credit Suisse had failed to provide a statement of Exposure (as it was contractually bound to do under the CSA).  That constituted a Potential Event of Default and Vestia sought to argue that that activated the condition precedent language in Section 2(a)(iii) of the Master Agreement - which in turn had the effect of suspending its obligation to pay the Delivery Amount. 

Again, the Court rejected the argument.  Citing the recent Lomas case, it ruled that Section 2(a)(iii) operated to suspend only future obligations and had no effect on obligations that had already accrued.  It also rejected a submission by Vestia that Lomas was not of general application and should be confined to its facts.   

The Court thus concluded that Credit Suisse's early termination notice was valid to terminate the Master Agreement.