UK: Early Termination Payment Calculated Under ISDA Master Agreement Enforced Against Quasi-Public Body Lacking Capacity

Last Updated: 20 October 2014
Article by Richard Caird, Sam Coulthard and Alexandra Doucas

Credit Suisse International v. Stichting Vestia Groep [2014] EWHC 3103 (Comm)

Mr Justice Andrew Smith (the Judge) has recently handed down judgment in a claim by Credit Suisse against a Dutch social housing foundation, Vestia, for the sum of approximately €83 million. For those who have followed the recent spate of disputes between banks and quasi-public bodies relating to derivative transactions which the latter entered into in times of plenty, only to discover that they were both financially disastrous and arguably outwith their capacity, the outcome of this case may come as a surprise. While Credit Suisse failed to convince the Judge that Vestia had capacity to enter into all of the transactions which were the subject of the dispute, it nonetheless succeeded in its contractual claim for the money it said was due. Characteristically, where a counterparty is found not to have capacity, the bank's contractual claims fail and it is left to recover what it can by way of restitution (often recovering much less than the contractual measure).

In reaching this result, the judgment considers a number of issues which are relevant both to those engaged in litigation of this type, and to users of ISDA documentation. In particular, this note considers:

1. When is a trade a Transaction within the meaning of the ISDA Master Agreement? If a number of trades are concluded at the same time, are they to be treated as a single contract, such that if one trade is void for lack of capacity, so are its more anodyne counterparts?

2. Where a counterparty lacks capacity to enter into a transaction with the result that the relevant contract is void, in what circumstances can a bank claim the contractual damages which would have been due had the contract been enforceable?


Vestia is a stichting, which under Dutch law is a foundation, or unincorporated legal person. It is a private entity, not a public law body, and is the largest housing association in the Netherlands, owning some 90,000 houses and employing more than 1,000 individuals, according to the judgment. Its object, as stated in its articles of association, is to operate in the area of social housing: building, letting and maintaining properties according to requirements, and "deploying all appropriate resources which help to achieve the object".

Vestia had, at the relevant time, large borrowings on which it paid a floating rate of interest. As its rental income was relatively fixed, it used derivatives to manage its liquidity and cash flow, and by the time it entered into the disputed transactions with Credit Suisse, it had already entered into numerous derivative transactions. The Judge accepted that Vestia's trading strategy involved hedging not only present debts, but future indebtedness, and that it hedged on a portfolio basis, not matching a specific hedging instrument to each loan. By October 2011, the gross notional value of Vestia's derivative portfolio was €23 billion compared with total borrowings of €5.3 billion.

Vestia and Credit Suisse entered into an ISDA 2002 Master Agreement (dated as of 9 November 2010) and Credit Support Annex (CSA) in order to undertake the relevant trades, all 11 of which were executed between November 2010 and September 2011. The trades comprised vanilla swaps, swaptions, Constant Maturity Swaps and a Callable Range Accrual Swap.

The Master Agreement was terminated by Credit Suisse in June 2012 after Vestia failed to meet a call for collateral amidst a general increase in its mark to market exposure. Vestia argued that it lacked capacity to enter into nine of the trades, whilst Credit Suisse maintained that Vestia had capacity to enter into all of them.

How many contracts?

Relevance of the issue

The first dispute considered by the Judge was how many contracts had come into being, on the basis that trades were frequently discussed together, agreed on the same call, and documented in the same Confirmation. Vestia said that where this had happened, each "group" of trades formed a single contract (or Transaction) either on the basis of the parties' oral agreement, or on the basis of the written documentation. Even if the trades did all form individual contracts, Vestia said that each one was necessarily conditional on the others in its group, such that if one was void, all the contracts in that group were too. Credit Suisse's position was that each trade was an independent contract.

The importance of this issue was that where English law holds that a company has purported to enter into a contract ultra vires, that contract is void in its entirety. It cannot be void only as regards the offending limb of the transaction, even where the company would have had the capacity to enter into other parts of the deal agreed.

While the ISDA Master Agreement specifically states that the Master Agreement itself and all Confirmations form a single contract, there was no suggestion that the Master Agreement itself was void. The parties proceeded on the basis that the issue in dispute was the number of Transactions which had come into being, and their validity.

The test to be applied

In determining how many Transactions had been concluded,  the Judge considered in detail the oral and written exchanges between the parties by which the trades had been agreed and documented. He held that the relevant test was not precisely the same as that used for contractual construction, but required him to determine what a reasonable man versed in the business would have understood the parties' intentions to be, based on the exchanges between them.

The Judge agreed with Vestia that a number of the trades should be grouped together, such that the nine disputed trades were held to have been agreed in only five separate Transactions or contracts. The Judge considered each trade in considerable detail in coming to this conclusion, but some of his reasoning is likely to be of broader interest to banks considering executing multiple trades simultaneously for the same client:

  • In relation to some of the trades, e.g. the first and second, the premium or rate offered in one trade had been adjusted in consideration of the other.
  • If it made obvious commercial sense for the ISDA netting provisions at section 2(c) of the Master Agreement to apply between two trades concluded at the same time, the Judge concluded that it was likely that the parties intended the two trades to be part of the same Transaction.
  • Where more than one trade was recorded in a single Confirmation:
    • there was no indication that Vestia was invited to agree the terms of one but not another; and
    • there was, on at least one occasion, a right to early termination which the Judge held must apply to all the trades, as there was nothing to indicate the contrary.

The argument as to how many Transactions were actually concluded is in many ways an odd one, but its effects are real. As well as its relevance in litigation where a lack of capacity taints at least some of the trades executed, the Judge's reasoning also provides some examples of why it is in banks' interests to be clear on the issue of number of trades versus number of contracts, such as the effect of netting provisions and early termination rights contained in Confirmations. In relation to the latter, in this case the Judge held that the right provided was to terminate all of the trades comprised in the Transaction early, or none at all. If the parties intended that trades could be terminated individually, they would have needed to say so.


Much of the discussion in relation to capacity related to Dutch law, and is of less general relevance, but the judgment provided a reminder of various broader principles.

First, Vestia's capacity was to be determined according to Dutch law as the place of its incorporation. The burden of proof was on Credit Suisse to show that Vestia had capacity, not the other way round.

Second, if Vestia lacked capacity, the consequences were to be determined by English law as the law of the putative contract. This approach followed the Court of Appeal's judgment some years ago in Haugesund Kommune v. Depfa. However, Credit Suisse indicated that it was likely to appeal the principle in Haugesund if the opportunity arose. The point at which such an appeal would be targeted is the arguably odd one that if a Dutch foundation like Vestia lacks capacity under Dutch law to enter into an agreement, English law says that the agreement is void, regardless of what Dutch law has to say on the issue. It remains to be seen whether this argument will be ventilated further. An interesting addition to it here was Credit Suisse's reference to the EU's First Directive on Company Law, which states that Member States should introduce legislation abrogating the doctrine of ultra vires so as to ensure security of transactions. The UK has done that in the form of sections39-40 of the Companies Act 2006, but its terms do not, on their face, apply to foreign companies. Both Vestia and the Judge recognised that the relevant provisions might, nonetheless, be extended to foreign companies to give effect to the Directive. The Judge did not consider this point further because, while the Directive applies to Dutch BVs and NVs, it does not apply to stichtings like Vestia. The point may, however, be taken further in another case.

In terms of whether Vestia actually had capacity or not, the Judge considered both documentary and expert evidence (in relation to Dutch law and to derivatives). It was not in dispute that housing associations like Vestia had the capacity to enter into some types of derivative contract, but the Judge accepted that Vestia only had capacity to enter into derivative transactions which could properly be regarded as "hedging instruments".

In considering that issue, he made it clear that he considered hedging instruments to include arrangements which reduced exposure to risks from borrowing, as well as eliminating it. He also considered that arrangements which protected against risks from anticipated future commitments as well as existing ones could be hedging instruments. Finally, the Judge took the view that individual trades could not be considered in isolation in view of Vestia's portfolio approach, and that a transaction would be within Vestia's capacity if it were part of a hedging strategy which reduced its exposure to risk.

The Judge considered each of the five Transactions he found had been concluded, and came to the conclusion that three were ultra vires and therefore void.

Effect of the Master Agreement

The Judge's conclusions as to the effect of the various representations and warranties given in the Master Agreement and related documents are the most interesting part of his findings. They will not be applicable in every case, but there are some general points, both of principle and contractual construction, which will be relevant more broadly.

The Judge considered three categories of representation and/or warranty, summarised below:

1. the representations given in section 3 of the Master Agreement at the time of its execution and deemed repeated on each date when a Transaction was entered into (that Vestia had the power to enter into the agreement and related documents, that it did not conflict with applicable law or its constitutional documents in doing so, and that the agreement was binding on it);

2. those given in a "Management Certificate" by Vestia at the time when the Master Agreement was entered into, and required by Credit Suisse pursuant to section 3(d) of the Master Agreement (stating that Vestia had the power to enter into a variety of derivative products, that it would not violate its articles of association or applicable law for it to do so, and that Vestia's board considered the proposed transactions to be conducive to the attainment of its objects); and

3. the "Additional Representations" contained in the Schedule to the Master Agreement, contemplated by section 3 of the Master Agreement, and including that "(i) [Vestia's] entry into and performance of its obligations under this Agreement and each Transaction hereunder is and will be in compliance with its articles of association...(ii) [Vestia] is entering into each Transaction purely for the purpose of hedging its exposures and not for the purpose of speculation".

The Judge considered that the first two categories were statements of past or present fact, and that they were representations only, and not warranties as to any future state of affairs. While the representations were repeated on the conclusion of each new Transaction, legally the ultra vires Transactions were never concluded, and therefore representations were never made in relation to them under the Master Agreement and Management Certificate.

He held that in any event, such a representation as to capacity could not confer on Vestia greater capacity than it actually had. Nor could a mere representation found a contractual estoppel to defeat Vestia's claim that the disputed Transactions were void.

By contrast, the Judge held that notwithstanding their description of "Additional Representations", the statements contained in the Schedule were contractual warranties. The Judge then went on to consider the principle of contractual estoppel, that parties are free to agree contractually what the basis of their dealings will be, and that they will be estopped from arguing later that their basis of dealing was actually something different. The Judge took the view that there was no reason why this same principle should not apply to agreements as to the future basis of dealings, as well as the past and present. Unlike the representations given in the Master Agreement and Management Certificate, the Additional Representations provided a warranty as to a future state of affairs.

The Judge held that the parties must have intended the Additional Representations to mean that future transactions should not be vitiated because of limitations in Vestia's articles of association or other relevant documents, and that Credit Suisse should be protected from that risk.

The Judge considered, and rejected, the suggestion that such an interpretation was inconsistent with the principle that a party cannot expand its own capacity by contract or estoppel. He held that here, Credit Suisse was not seeking to assert that void Transactions were valid, it was seeking to enforce the Master Agreement  as if those Transactions were valid. It was not open to Vestia to dispute its liability under the Master Agreement on the grounds that certain of the Transactions were ultra vires.

In the alternative, the Judge also agreed that Credit Suisse should succeed in a claim for damages for Vestia's breach of warranty, the measure of its damages being the amount it would have received had the breach not occurred.

The Judge did not, however, find in Credit Suisse's favour in relation to its claim for a smaller amount of damages claimed for negligent misrepresentation on the basis that Vestia's representations as to capacity were untrue. He rejected this claim on the basis that: (a) the representations made in the Master Agreement and Management Certificate related to the time at which they were given only and were true at that stage; and (b) there was no evidence that Credit Suisse had relied on the representations when entering into each of the Transactions.

Events of default and failure to provide collateral

Vestia raised a further defence that (in summary) by the time Credit Suisse terminated the Master Agreement, the mark to market value had changed again such that it was no longer contractually obliged to provide collateral. It claimed that, on that basis, there was no continuing event of default in respect of which the Master Agreement could be terminated.

The Judge rejected that conclusion, holding that the original failure to provide collateral was a continuing event of default.


While there are a number of other interesting points arising out of this judgment, it is the finding as to the binding effect of the Additional Representations which is most significant.

The Judge's reasoning is likely to be scrutinised by other banks which find themselves involved in litigation of this kind. However, perhaps more importantly, it suggests a way in which banks can try to draft their way out of capacity problems, which have previously been (in effect) a legal risk which could not be mitigated contractually. The Judge took the view that the Additional Representations in this case were poorly drafted, but clear. It should, therefore, be possible in other cases for banks entering into derivative transactions with entities whose capacity might be questioned to amend their documentation such that they receive warranties that all future transactions will be entered into in compliance with their permitted objectives. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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