Factual and Procedural Background
This opinion concerns proceedings in which Company A claims €83,196,829 from Company B, a Dutch social housing association ("SHA"), as money due under an International Swaps and Derivatives Association ("ISDA") 2002 Master Agreement including a Credit Support Annex ("CSA"). Company A contends that it validly terminated the Master Agreement after Company B failed to provide required security, and that the Early Termination Amount due is €83,196,829. Company B disputes the claim on grounds that some derivative transactions ("disputed transactions") were ultra vires and lacked capacity, that the relevant officers lacked authority to enter into them, and that the termination notice was invalid as there was no default at the time it was sent.
Company A originally pleaded alternative claims for higher sums but limited the principal claim to €83,196,829 during trial. Company B disputes the calculation of this sum and puts forward lower figures, but this dispute was deferred for later determination due to trial time constraints.
If the main claim fails, Company A has alternative claims for damages for breach of undertakings by Company B regarding capacity and authority and for damages for negligent misrepresentations, the latter having been narrowed during trial.
The transactions in dispute arose from eleven derivative transactions entered into between November 2010 and September 2011, including interest rate swaps, swaptions, Constant Maturity Swaps ("CMS"), cancellable swaps, and a callable range accrual swap. Company B accepts two of the transactions as binding payer swaps. Company B contends that the disputed transactions were entered into in groups of contracts rather than as separate contracts, which affects the capacity and authority issues.
The Master Agreement is valid and binding on Company B and provides that all transactions entered into under it form a single agreement. The dispute about the number of contracts relates to whether each transaction is a separate contract or a supplement to the Master Agreement.
Company A is a large global investment bank operating from London. Company B is a Dutch SHA operating under a complex regulatory framework including Dutch housing legislation, ministerial decrees, and supervision by governmental bodies. Company B is a foundation ("stichting") with objects reflecting social housing and financial regulations aimed at risk-averse treasury management to ensure financial continuity and liquidity.
Company B's financial regulations and accounts reflect extensive use of derivatives for hedging interest rate risks on borrowings, managed on a portfolio basis. Company B's treasury and control manager had primary responsibility for derivatives and was the main contact with Company A.
Company A and Company B negotiated and concluded the disputed transactions mostly by telephone, followed by documentation including Final Indicative Terms and Conditions and Confirmations signed by Company B's managing director. Company A's internal procedures required approval for non-standard transactions, which was obtained for several disputed transactions.
Company B's financial position deteriorated due to significant mark-to-market exposures on its derivative portfolio following falling interest rates, leading to disputes over collateral calls and termination of the Master Agreement by Company A. Company B dismissed its treasury manager amid allegations unrelated to these transactions.
The trial involved extensive factual and expert evidence, including on Dutch law regarding capacity and the regulatory context of SHAs, and on derivatives and market practices. Neither Company B's treasury manager nor managing director gave evidence, and their absence was explained by pending and contemplated litigation against them.
Legal Issues Presented
- Whether the disputed transactions were entered into as separate contracts or as grouped contracts, affecting the application of capacity and authority defences.
- Whether Company B had capacity under Dutch law to enter into the disputed transactions, considering their objects and regulatory framework.
- Whether the relevant officers of Company B had authority to enter into the disputed transactions.
- Whether the termination notice served by Company A was valid under the Master Agreement and CSA.
- Whether Company A can enforce the disputed transactions or recover damages for breach of warranties or misrepresentations despite any lack of capacity or authority.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Credit Suisse v Allerdale [1997] QB 306 |
Principle that a single contract cannot be partly ultra vires; if part is ultra vires, the entire contract is void. |
Applied to conclude that the disputed transactions grouped in contracts must be considered as whole units for capacity analysis. |
| Wisniewski v Central Manchester Health Authority [1998] Lloyd's LR (Med) 223 |
Principles governing adverse inferences from failure to call witnesses. |
Applied to explain why no adverse inference was drawn from absence of Company B's officers' evidence. |
| ICS v West Bromwich Building Society [1998] 1 WLR 896 |
Principles of contractual interpretation regarding parties' intentions. |
Discussed in relation to determining whether parties intended multiple contracts or a single contract. |
| Crest Nicholson (Londinium) Ltd v Akaria Investments Ltd [2010] EWCA Civ 1331 |
Distinction between contractual formation and interpretation. |
Used to clarify approach to determining number of contracts formed. |
| Haugesund Kommune v Depfa ACS Bank [2010] EWCA 579 |
Applicable law for capacity issues and effect of ultra vires contracts under English law. |
Accepted that capacity is governed by Dutch law but consequences of incapacity by English law. |
| Joseph Constantine SS Ltd v Imperial Smelting Corp Ltd [1942] AC 154 |
Burden of proof lies on party asserting positive case. |
Applied to place burden on Company A to prove capacity. |
| York Corp v Henry Leetham & Sons [1924] 1 Ch 557 |
Ultra vires contracts are void and cannot be ratified. |
Applied to confirm that ultra vires contracts are void ab initio. |
| Credit Lyonnais Bank Nederland BV v Maatschappij voor Nederlandsch Grondbezit BV (1986) |
Duty to investigate where circumstances are suspect; knowledge of defects attributed to entity. |
Applied to conclude Company A should have been aware of ultra vires nature of contracts. |
| Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386 |
Doctrine of contractual estoppel: parties bound by agreed facts regardless of actual truth. |
Applied to assess whether Company B is contractually estopped from denying capacity or authority. |
| Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890 |
Warranty of capacity in ultra vires contracts is itself ultra vires. |
Recognised in rejecting "bootstraps" argument on warranties repeating capacity. |
| Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419 |
Distinction between sums due before and after Event of Default; sums due before remain payable. |
Applied in considering validity of termination notice despite failure to provide exposure statement. |
| Barclays Bank Plc v Metcalfe & Mansfield Alternative Investments VII Corp [2013] OJ no 3691 |
Simultaneous defaults do not invalidate notice of early termination if party is non-defaulting re specific Event of Default. |
Referenced in argument but not decided upon in this case. |
| Pickering v Stephenson (1872) LR 14 Eq 322 |
No agent has authority to act outside the capacity of the principal entity. |
Applied to reject apparent authority for ultra vires contracts. |
| Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1 |
Public policy underlying ultra vires doctrine protects the public interest. |
Referenced in context of estoppel and capacity arguments. |
| Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386 |
Contractual estoppel principle. |
Applied to assess warranties and contractual estoppel arguments. |
| York Corp v Henry Leetham & Sons [1924] 1 Ch 557 |
Ultra vires contracts cannot be validated by estoppel or ratification. |
Applied to reject estoppel extending capacity. |
Court's Reasoning and Analysis
The court began by addressing whether the disputed transactions constituted separate contracts or grouped contracts. Applying principles of contract formation and interpretation, the court found that the disputed transactions were entered into as seven separate contracts grouped as follows: (i) transactions 1 and 2; (ii) transactions 3, 4 and 5; (iii) transaction 6; (iv) transactions 7 and 8; (v) transaction 9; (vi) transaction 10; and (vii) transaction 11. This conclusion was supported by the nature of the transactions, telephone exchanges between the parties, and the Confirmations signed by Company B.
Turning to capacity, the court applied Dutch law as the law of Company B's incorporation. It accepted the principle that capacity is to be assessed by reference to Company B’s objects as stated in its articles and interpreted in light of Dutch law doctrines, including the "secondary acts" doctrine as explained in leading Dutch Supreme Court decisions. The court found that Company B’s objects required it to operate exclusively in the field of social housing and that financial management, including use of derivatives for hedging, was a secondary act conducive to achieving that object.
The court held that Company B had capacity to enter into transactions that genuinely constituted hedges against its borrowing liabilities, including instruments that reduced or eliminated risk on existing or anticipated borrowings, and that hedging could be done on a portfolio basis. Company B also had capacity to restructure its hedging portfolio by amending or cancelling transactions.
Applying these principles to the disputed contracts, the court found that Company B had capacity to enter into the contract comprising transactions 1 and 2 and the restructured transaction 6, as these provided protection against interest rate movements consistent with hedging. However, it found that Company B did not have capacity to enter into the contracts comprising transactions 3, 4 and 5; transactions 7 and 8; and transaction 9 ("ultra vires contracts"). These latter contracts did not sufficiently reduce Company B’s exposure to risk or fit into a hedging strategy, and some increased exposure to interest rate movements or were speculative in nature.
Under English law, the governing law of the contracts, ultra vires contracts are void and cannot be ratified or validated by estoppel. The court rejected arguments that statutory provisions or common law should protect Company A from the consequences of ultra vires contracts with Company B, a stichting. It also rejected any apparent authority of Company B’s officers to enter into or ratify ultra vires contracts.
Company A relied on warranties in the Master Agreement’s Additional Representations, including that Company B’s entry into transactions would comply with its articles and be for hedging purposes. The court interpreted these Additional Representations as contractual warranties intended to cover future transactions, including ultra vires contracts. The court held that these warranties do not extend Company B’s capacity but do prevent Company B from denying liability under the Master Agreement on grounds of lack of capacity or authority in respect of the ultra vires contracts.
The court rejected Company B’s argument that it could extend its capacity by estoppel or contract and held that ultra vires contracts remain invalid, but Company B's breach of warranty under the Master Agreement entitles Company A to enforce the Master Agreement or recover damages.
Company A’s claim for misrepresentation was rejected as the representations were not about future transactions and there was no evidence of reliance or loss caused by misrepresentations.
Regarding the termination notice, the court found that Company A validly terminated the Master Agreement for Company B’s failure to provide collateral. Although Company A failed to provide a statement of exposure by the contractual deadline, this did not prevent Company A from exercising its right to terminate. The court rejected Company B’s argument that it was pointless to provide collateral after market movements reduced exposure below the threshold and held that the Event of Default was continuing at the time of termination.
In conclusion, the court allowed Company A’s claim under the Master Agreement for the Early Termination Amount or damages in that amount, subject to determination of the calculation of the Early Termination Amount.
Holding and Implications
ALLOWANCE OF CLAIM
The court held that Company A is entitled to recover the sum claimed under the Master Agreement, either as the Early Termination Amount or as damages for breach of warranty, notwithstanding that some of the disputed contracts were ultra vires and invalid under Dutch law. The Master Agreement’s warranties prevent Company B from denying liability on grounds of lack of capacity or authority.
The termination notice served by Company A was valid and effective despite certain procedural breaches that did not affect the accrued rights to terminate.
The direct effect of this decision is that Company A’s claim succeeds and Company B is liable to pay the amount claimed. The court did not set any new precedent beyond applying established principles of Dutch and English law to the facts. The precise amount recoverable will be subject to further determination of the calculation of the Early Termination Amount.