Credit Suisse International v Stichting Vestia Groep

A legal entity’s capacity to enter into financial derivatives depends on whether the transaction serves its objects, assessed objectively and at the time of contracting. For a regulated social-housing foundation, derivatives fall within capacity where they form part of a strategy that reduces or manages an actual or anticipated exposure, including on a portfolio basis. A transaction need not eliminate risk completely and may also reduce funding costs.

Where transactions are outside capacity, the common-law consequences are ordinarily invalidity. However, parties may validly warrant under a master agreement that purported transactions will comply with the entity’s constitution and will be entered into for hedging purposes. Breach of those warranties may prevent the entity from relying on invalidity and may give rise to damages.

Credit Suisse claimed €83,196,829 from Stichting Vestia Groep under an ISDA Master Agreement after terminating the parties’ derivatives arrangements following Vestia’s failure to provide collateral. Vestia relied on capacity, authority and notice defences.

The disputed arrangements comprised five contracts. The court had to determine whether they were separate contracts, whether Vestia had capacity under Dutch law to enter them, the consequences of any incapacity under English law, whether the Master Agreement’s representations and warranties preserved Credit Suisse’s rights, and whether the termination notice was valid.

1. Contracts. The parties made seven contracts. Transactions 1 and 2, transactions 3, 4 and 5, and transactions 7 and 8 each formed single contracts. The confirmations reinforced that conclusion. The contractual arrangements were binding from the time the relevant terms were agreed under section 9(e)(ii) of the Master Agreement.
2. Capacity. Under Dutch law, capacity was assessed by the secondary-acts doctrine. All relevant circumstances were considered objectively and ex tunc, including Vestia’s foundation status, its regulated social-housing role, the Housing Act, the BBSH and ministerial guidance. Hedging could be conducted on a portfolio basis and could cover anticipated liabilities, partial protection and liquidity risks.
3. Vestia had capacity to enter the contract comprising transactions 1 and 2 and the restructured transaction 6. Credit Suisse had not proved that the contracts comprising transactions 3, 4 and 5, transactions 7 and 8, and transaction 9 had a hedging effect or formed part of a hedging strategy. Those contracts were ultra vires.
4. Consequences and contractual protection. Under English law, an ultra vires contract was ordinarily invalid. Vestia could not enlarge its capacity by estoppel. Nevertheless, the compliance and hedging provisions in the Additional Representations were contractual warranties covering future purported transactions. Vestia breached those warranties. Credit Suisse could therefore enforce the Master Agreement as if the transactions were valid, alternatively recover damages for breach of warranty.
5. The authority defence failed for the same reason. The notice defence also failed. The obligation to provide collateral accrued when the call was made and remained unpaid; the later fall in exposure below the threshold did not retrospectively remove the continuing default. Credit Suisse was entitled to designate an Early Termination Date.

Credit Suisse’s claim under the Master Agreement succeeded. The recoverable amount remained to be determined in relation to the parties’ dispute over the calculation of the Early Termination Amount.