Secure Capital SA (SC) was the owner of the entire beneficial interest in a series of notes issued by Credit Suisse (the Notes). The Notes were governed by English law and issued in bearer form. SC held its interest in the Notes through Clearstream. It argued that a provision of Luxembourg law (under which Clearstream operates) gave it the right to assert a claim directly against Credit Suisse for breach of the terms of the Notes. In this judgment, the Court of Appeal rejected that argument, upholding the decision at first instance that Credit Suisse should be granted summary judgment on the claim. The Court of Appeal's conclusion is unsurprising, and reinforces the very limited rights of those having a beneficial interest in bearer notes to enforce their terms.

The Notes

The Notes were linked to life insurance policies, and payment on them was contingent on mortality rates amongst a set of "reference lives". Shortly after the Notes were issued, a change in the mortality tables used to generate estimated life expectancies rendered the Notes effectively worthless. SC argued that Credit Suisse knew or ought to have known of the imminent change, but failed to disclose it, in breach of a term contained in the Pricing Supplement to the Notes. The relevant term was to the effect that Credit Suisse had taken all reasonable care to ensure that information was correct, and that there were no omissions that would make the information provided misleading. The claim was therefore a contractual claim in relation to alleged misleading statements.

The Notes were issued subject to the terms contained in various documents. They were issued in bearer form, each one represented by a single Permanent Global Security which was held by Bank of New York Mellon (BNYM) as common depositary. Interests in the Notes were traded through Clearstream, between accounts held by its members (Account Holders), including, in this case, RBS Global Banking Luxembourg SA (RBSL). Payments due under the Notes would be made by Credit Suisse to Clearstream, and from Clearstream to the Account Holders, who would distribute any sums as appropriate to those of its clients who had an interest in the Notes (the Account Owners). Ultimately, and prior to the issue of these proceedings, RBSL held the whole interest in the Notes for the account of SC as Account Owner.

The Court of Appeal noted the "no look through" principle, under which this system operates. In other words, each link in the chain only has recourse against its immediate counterparty.

Arguments advanced by SC

On this basis, English law gives SC no right to sue Credit Suisse for a breach of the terms of the Notes. SC, however, relied on a provision of Luxembourg law, as the law applying to settlements under the Clearstream system. In particular, it relied on Article 8(1) of Luxembourg law dated August 2001 on the circulation of securities. That provision stated that "the investor may exercise or arrange to exercise corporate rights attached to the securities and the rights attaching to the holding of securities linked to the possession of the securities by producing a certificate drawn up by the relevant account holder attesting to the number of securities registered in its custody account".

SC said that the effect of this provision was to allow it, as Account Owner, to exercise rights attached to the Notes (other than payment rights) and bring proceedings against the issuer for breach of terms of the Notes (other than payment terms).

The precise nature of SC's argument seems to have changed over time, presumably because the nature of the rights it asserted was difficult for it to define in a way that assisted its case. Ultimately, it did not argue that it was entitled to assert the rights of the bearer of the Notes (accepting that BNYM retained those rights), but said that it was entitled to assert a "parallel but independent right of action" that did not fit existing categorisations (such as contractual or proprietary) and should be treated sui generis.

SC argued, in summary, that English law governed the question of whether there had been a breach of the Notes, but that the question of who was entitled to sue was for Luxembourg law as the law of the settlement system. Further, it argued that the relevant aspect of Luxembourg law was incorporated by reference into the terms of the Notes (an argument that the Court of Appeal rejected on the facts).

Approach to determining the applicable law

The Court of Appeal noted the reference of the judge at first instance to Raiffeisen Zentralbank Österreich v. Five Star Trading1, setting out the principles for determining the applicable law as involving a three-stage process of: (1) characterising the relevant issue; (2) selecting the rule of conflict of laws which lays down a connecting factor for that issue; and (3) identifying the system of law which is tied by that connecting factor to that issue. The same authority, however, warns against a "mechanistic application" of the three-stage test, and against taking each of the three stages in isolation.

The overwhelming difficulty for SC, both at first instance and on appeal, was that, because it pleaded its case only for breach of contract (presumably for particular reasons), the court was resistant to the suggestion that it should not be characterised as a contractual case. This clearly drove SC's assertion of a right that was sui generis and incapable of categorisation, but the point was inevitably difficult for it.

The Court of Appeal's conclusions

Lord Justice David Richards, giving the Court of Appeal's judgment, dismissed SC's appeal. He said: "Under English conflicts of law principles, the identification of the parties entitled to sue on a contract is governed by the proper law of the contract." In this case, that was English law and, on that basis, the only person entitled to sue Credit Suisse on the terms of the Notes was their holder, BNYM.

David Richards LJ rejected the argument that the "no look through" principle applied only to payment obligations. He noted in particular the language in the Programme Memorandum stating that Account Holders must look solely to Clearstream in relation to their shares of payment "and in relation to all other rights arising under the Global Securities". He further noted the limited provisions allowing parties to proceed against Credit Suisse in certain circumstances, finding that this was indicative of the general position being that only the holder of the Notes could sue.

It is plain that the Court of Appeal felt that SC was searching for a novel way around the various insuperable barriers to its breach of contract argument. David Richards LJ said that he was unable to understand the principle that could justify SC's approach, and that the novelty of the situation meant that there was no authority on which SC could rely.

The Court of Appeal also stated that SC's approach could lead to a potentially "incoherent, if not chaotic" result. Clearstream is governed by the laws of Luxembourg, but there are other settlement systems governed by other laws, e.g. Euroclear (subject to Belgian law) and the DTC (subject to US law). On that basis, the issue of whether or not an issuer would be subject to direct claims from those having an interest in securities would depend on the system through which those interests were held.

The "lacuna" argument

One of the interesting aspects of the judgment is the pragmatic (and quite robust) approach of the Court of Appeal. SC argued that a system whereby only the holder of the Notes could enforce their non-payment terms created a lacuna in relation to claims of the kind it was advancing. In a contractual claim for breach of a clause relating to the accuracy of information provided, the holder of the Notes would be the only party entitled to bring a claim, but would never suffer a loss of that kind as it had no commercial interest in the Notes.

The Court of Appeal's response to this was, first, that this only applied to claims in contract, and there was no suggestion that a claim in tort in relation to misleading statements would suffer from the same defect. Second, the Court of Appeal said that a lacuna could not exist if the outcome SC identified was the one the parties intended. Parties like SC knew that they were, in fact, trading in interests in securities, not the securities themselves. The limitations on direct action were part of an overall package of rights that a party in the position of SC chose to trade. The underlying logic of the Court of Appeal's decision was that SC could not cherry-pick those terms of the Notes that suited it, and discard the rest.


This decision is unsurprising, in that SC's arguments were somewhat ambitious set against the language of the Notes. However, the judgment is also welcome, in that any decision to the contrary would have opened the way for the chaotic result the Court of Appeal identified.


1. [2001] QB 825 at 840

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