Banco Santander Totta SA v Companhia De Carris De Ferro De Lisboa SA & Ors

Public-sector companies had capacity to enter complex interest-rate swaps where the transactions were capable of assisting their commercial purposes, including financial management and reduction of borrowing costs. The swaps were not rendered speculative merely because they involved substantial risk.

For Article 3(3) of the Rome Convention, the relevant situation may include international standard documentation, assignment rights, an international derivatives market and back-to-back transactions with foreign banks. The swaps were therefore not purely domestic Portuguese contracts.

The court further held, conditionally, that the swaps were not unlawful games of chance and that the Portuguese abnormal-change-of-circumstances rule would have been satisfied by the prolonged, unprecedented near-zero interest-rate environment, although that rule was not applicable under the contractual choice of English law.

Banco Santander Totta SA claimed payment and declarations that nine long-term “snowball” interest-rate swaps with four Portuguese public-sector transport companies were valid and enforceable. The swaps were governed by English law and contained English jurisdiction clauses.

The defendants argued that they lacked capacity under Portuguese law, that the swaps were unlawful games of chance, that the choice of English law could not exclude Portuguese mandatory rules under art 3(3) of the Rome Convention, that an abnormal change of circumstances justified termination, and that the bank had breached duties under the Portuguese Securities Code.

The court determined the capacity, applicable-law, gaming, abnormal-change and Securities Code issues after a lengthy trial.

1. Capacity. The court preferred the evidence that the capacity rules in art 6 of the Commercial Companies Code and art 25(2) of the RSBS governed the relevant companies. Capacity extended to rights and obligations necessary or convenient for pursuing the company’s purpose or objects. Each swap was capable, when entered, of assisting the relevant company’s financial management, pursuit of profit or operation of its transport system. The speculative character alleged by the defendants did not remove capacity.
2. Rome Convention. Article 3(3) was not engaged. The inquiry was not confined to connections pointing to the law of another particular country. It included elements indicating that an apparently domestic transaction was international. The right to assign to a non-Portuguese bank, the use of the Multicurrency-Cross Border ISDA form, the international derivatives market, the foreign banking group’s practical involvement and the back-to-back hedging arrangements were relevant. The contracts were not purely domestic Portuguese contracts.
3. Games of chance. The court held, alternatively, that the swaps were not bets or gaming contracts. The Securities Code constituted special legislation, and the swaps had the recognised purpose of reducing financing costs. Speculation in financial dealing was not necessarily gambling, and the distinction between hedging and speculation was difficult to apply without a legal definition.
4. Abnormal change of circumstances. Alternatively, the court held that art 437 of the Portuguese Civil Code was derogable and therefore outside art 3(3). If applicable, however, the prolonged and unprecedented near-zero interest-rate environment following the global financial crisis was an abnormal change of circumstances. That risk was not covered by the snowball swaps, and requiring the transport companies alone to bear the resulting burden would seriously breach good faith. Seven swaps would therefore have been eligible for termination or modification, subject to the statutory preference for modification.
5. Securities Code. When acting as principal on its own account, the bank’s duties under arts 304 and 309 were commensurate with that relationship. The general duties were satisfied, so far as relevant, by compliance with the information duties in art 312. The bank was not under a duty to advise on suitability or to refrain from proposing the swaps merely because they were risky or potentially favourable to the bank. No breach was established.
6. Disposition. The overall decision was in favour of the bank. Consequential submissions on the form of order were directed to follow.

First-instance decision. The judgment states that the claims were issued in May 2013 and transferred to the Financial List on 12 October 2015. No earlier appellate decision in this litigation is stated.