FML Timeline: Credit Suisse International v Stichting Vestia Groep

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A Dutch social housing association, Stichting Vestia Groep (Vestia), entered into a number of transactions with Credit Suisse International (Credit Suisse) between November 2010 and September 2011. The transactions were governed by a single ISDA 2002 Master Agreement, accompanied by a Credit Support Annex. Following Vestia’s financial deterioration, Credit Suisse requested that Vestia post collateral. Having failed to do that, Credit Suisse terminated the swaps in June 2012.

Credit Suisse sought approximately €83m as an early termination payment and issued proceedings to enforce the debt. Vestia argued that certain of the transactions were outside their Articles of Association (on the basis that they were speculative, rather than hedging, transactions), and so ultra vires. Vestia also claimed that the early termination notice was invalid. Credit Suisse brought an alternative claim for damages for breach of undertakings given by Vestia (including as to its capacity) and for breach of representation.

Decision

Despite its lack of capacity to enter into certain of the transactions, Vestia was contractually estopped from avoiding liability under the transactions by arguing that certain of the swaps were ultra vires. This was as a result of certain additional representations included in the Schedule to the ISDA Master Agreement.

In reaching its conclusion, the court had to consider (amongst others) the following issues:

Vestia’s capacity: Dutch law or English law?

Whilst the issue of whether Vestia had capacity to enter into the transactions was a matter of Dutch law (in light of Vestia being Dutch-incorporated), the legal consequences flowing from any lack of capacity were a matter of English law (under the ISDA Master Agreement).

This followed the decision in Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579.

Vestia’s capacity: the legal ramifications

The English Court ruled that, as a matter of Dutch law, Vestia lacked capacity to contract with Credit Suisse under certain of the swaps as it had indeed acted ultra vires on account of restrictions in its Articles.

Having established that Vestia lacked capacity, the court then considered the consequences on the validity and enforceability of Credit Suisse’s rights under the ISDA Master Agreement, as a matter of English law.

Whilst the general common law position is that contracts entered into ultra vires are non-binding and void, the court pointed to the inclusion of additional representations in the Schedule to the ISDA Master Agreement to depart from this position. Under these additional representations (which were drafted as representations and warranties, Vestia repeated - each time it entered into a transaction - that entering into the transaction was in compliance with its Articles (and so within its capacity).

The Court explained that these additional representations reflected the parties’ common intention that Credit Suisse’s rights under the ISDA Master Agreement would not be extinguished by virtue of Vestia’s lack of capacity to contract. Construed as such, they amounted to warranties that Vestia was capable of entering into the transactions, and survived the transactions (notwithstanding that those transactions would have otherwise been void).

Accordingly, the Court agreed with Credit Suisse’s arguments concerning the valid termination of the ISDA Master Agreement, estoppel and, in the alternative, breach of warranty. Credit Suisse was able to recover money due under the ISDA Master Agreement or alternatively damages for breach of warranty.

Noteworthy/Novel points

Additional representations in a Schedule to an ISDA Master Agreement were regarded as valid and enforceable warranties that could be relied on by the bank to allow it to successfully recover sums due to it, even in relation to transactions which were ultra vires the counterparty.

Credit Suisse would have been unlikely to succeed in its claim had it not negotiated these additional representations with Vestia. 

Please also refer to our related article High Court rejects ultra vires defence in ISDA swaps case.