In the recent case of Credit Suisse International v Stichting Vestia Groep  1 – the English High Court considered a host of issues arising in connection with some OTC derivatives entered into by Credit Suisse with a Dutch social housing association, Vestia.
The specific vires issues are local to the Netherlands but the judgment, which runs to 120 pages, addresses a number of issues which are of general application to English law governed ISDA Master Agreements.
The key issues which were considered are:
- Whether the standard representations in Section 3(a) provide protection to a bank when facing vires issues.
- Whether alternative representations and warranties can provide that protection.
- Whether multiple related transactions can be regarded as a single trade/contract – with potential unanticipated cross-linkage/contamination (in this context for vires purposes).
- Whether collateral demanded under a CSA has to be posted even where the market has moved to eliminate the requirement.
- Whether the failure to provide a statement of Exposure under a CSA constitutes a Potential Event of Default for the purposes of Section 2(a)(iii), meaning that the person on whom the demand is made does not have to provide the collateral demanded.
Our briefing note on the case reviews the facts and main issues but, in summary we can take some useful guidance:
- If a counterparty is an entity in relation to which vires is likely to be an issue, care should be taken in relation to linked transactions – otherwise a court may conclude, as here, that such transactions form one contract that is outside the capacity of such entity;
- There is a good reason for expressing representations additionally as warranties – a warranty might afford a remedy in damages that a representation may not;
- Care should also be taken in relation to the placing of additional warranties – if in a valid Master Agreement, that may afford a remedy in damages; if in a confirmation of an ultra vires transaction, it may not;
- The obligation to deliver collateral under a CSA remains even if the markets have moved between the time of the collateral call and the serving of an early termination notice for failed delivery of collateral;
- Section 2(a)(iii) only allows future payments and deliveries to be withheld; payments and deliveries which are already due still have to be made.
1 EWHC 3103 (COMM)