Credit Suisse International v Stichting Vestia Groep

The court decided a claim by Credit Suisse under an ISDA 2002 Master Agreement (including a Credit Support Annex) against Vestia, a Dutch social housing association, for an Early Termination Amount following termination. The main legal issues were: (i) whether particular over-the-counter derivative transactions were within Vestia's corporate objects (capacity) under Dutch law; (ii) whether those transactions were entered into or confirmed with authority; and (iii) whether Credit Suisse validly terminated under the Master Agreement and the CSA.

The judge found that, on the facts, the parties entered into seven separate contracts under the Master Agreement, and that three of those contracts (comprising six of the disputed transactions) were outside Vestia's capacity under Dutch law because they were not properly hedging transactions within the scope of a Dutch admitted social housing association's objects. The other contracts (including two plain-vanilla swaps and a restructured cancellable swap) were within Vestia's capacity.

Despite the invalidity of the ultra vires contracts under Dutch law, the court held Credit Suisse entitled to judgment because Vestia had given contractual warranties in the Master Agreement (and the incorporated Management Certificate) that transactions under the Master Agreement complied with Vestia's articles, Financial Regulations and applicable rules and that transactions were entered for hedging purposes. Those contractual warranties were held to be intended as binding contractual undertakings and to cover the position of transactions subsequently entered into under the Master Agreement; accordingly Vestia could not rely on lack of capacity or authority as a defence to Credit Suisse's claim under the Master Agreement. The court also rejected Vestia's challenge to the validity of Credit Suisse's termination notice under the CSA and Master Agreement.

The claim concerned sums said to be due after Credit Suisse terminated an ISDA Master Agreement and a Credit Support Annex with Vestia, a large Dutch social housing foundation. Credit Suisse asserted an Early Termination Amount of €83,196,829. Vestia defended the claim principally by asserting that six of the derivative transactions were outside its corporate objects and therefore void under Dutch law (the "capacity defence"); that the trades were made without authority (the "authority defence"); and that Credit Suisse had not validly terminated because of errors in notice and subsequent movements in the mark-to-market exposure (the "notice defence").

Background and factual context

• Between late 2010 and September 2011 Credit Suisse and Vestia entered into a series of interest rate swaps, swaptions and structured derivatives. Eleven confirmations issued; Vestia accepted two plain-vanilla swaps as plainly within capacity. Nine disputed transactions were alleged to comprise five or more contracts.
• Vestia is an admitted Dutch social housing association (stichting) operating in a tightly regulated public-law environment; its articles require working exclusively in the field of social housing. Dutch rules and ministerial guidance require risk-averse financial management; Vestia had internal Financial Regulations and used derivatives as part of treasury management and purported hedge accounting.

Procedural posture and issues

• This was a first-instance trial in the Commercial Court. Parties led factual and expert evidence (including Dutch private-law experts and market/derivatives experts). Key issues for decision were: how many contracts were made; whether disputed contracts were within Vestia’s objects under Dutch private law; whether the relevant officers had authority; whether contractual warranties and the Management Certificate precluded Vestia from relying on capacity/authority; and whether termination under the CSA was valid given the parties’ actions and notices.

Court’s reasoning on the principal issues

1. Whether transactions were separate contracts: the judge analysed contemporaneous telephone negotiations, term sheets and confirmations. He concluded the parties formed seven legal contracts (rather than eleven): transactions 1+2, 3+4+5, restructured 6, 7+8, 9, 10 and 11. The finding turned on the commercial context, the way the parties negotiated, and the wording and structure of the confirmations.
2. Capacity under Dutch law: applying the Dutch private-law doctrine of "secondary acts" (as explained in Dutch authority such as De Wereld and Playland), the judge held that an act is validly within a foundation's objects if it objectively serves the foundation's interests and is reasonably conducive to the statutory object. The judge accepted that hedging transactions to manage treasury exposures are capable of being secondary acts for an admitted SHA but concluded that (on the balance of probabilities) the contracts comprising transactions 3+4+5, 7+8 and 9 were not genuine hedges of identifiable borrowing or liquidity exposures and were therefore ultra vires under Dutch law. Transactions 1+2 and the restructured 6 and the two plain-vanilla swaps were within Vestia’s capacity.
3. Consequences of incapacity and authority: the judge accepted that, under English choice-of-law rules and authority (Haugesund), consequences of capacity issues are governed by the law applicable to the putative contract (English law here). But he nonetheless examined the Dutch position: under the DCC a third party may be prevented from enforcing an ultra vires act only if it knew or ought to have known of the lack of capacity. The judge concluded that Credit Suisse (through its speakers) should have appreciated that some transactions were outside Vestia’s objects.
4. Contractual warranties and estoppel: critically, the Master Agreement Schedule contained "Additional Representations" and the Management Certificate which, the court found, operated as contractual warranties that transactions entered under the Master Agreement would comply with Vestia's articles, Financial Regulations and applicable rules and be for hedging purposes. The court held these provisions were intended to be binding contractual undertakings; they covered subsequent transactions and therefore precluded Vestia from avoiding liability on the basis that the disputed contracts were ultra vires or entered without authority.
5. Termination/notice under the CSA and Master Agreement: the court rejected Vestia's challenge that Credit Suisse's termination was invalid. Although Credit Suisse had failed to provide a collateral exposure statement on one Tuesday as strictly required by the CSA, the court held that the failure did not prevent Credit Suisse from validly designating an Early Termination Date where Vestia had failed to post collateral and the default continued; the court relied on authority about termination rights under ISDA forms.

Result The court allowed Credit Suisse’s claim under the Master Agreement and gave summary reasoning that, because the contractual warranties in the Master Agreement covered compliance with Vestia’s articles and hedging requirements, Vestia could not avoid liability by asserting lack of capacity or authority. The judge directed that the quantification of the Early Termination Amount be determined subsequently.

At first instance the court allowed Credit Suisse’s claim. The judge found that although several disputed derivative contracts were ultra vires Vestia under Dutch private law (not genuine hedges within a Dutch SHA’s objects), Vestia had given contractual warranties in the ISDA Master Agreement (and the Management Certificate) that transactions entered under the Master Agreement complied with its articles/financial rules and were for hedging purposes. Those warranties were intended as binding contractual undertakings and prevented Vestia from relying on lack of capacity or authority as a defence to Credit Suisse’s claim under the Master Agreement. The court also rejected Vestia’s challenge to Credit Suisse’s termination notice under the CSA and Master Agreement. The court allowed the claim and directed that the calculation of the Early Termination Amount be determined subsequently.