Out-Law News 1 min. read

Court of Appeal clarifies contractual rights for issuers of bearer notes

The Court of Appeal (CoA) has issued a landmark judgment which clarifies the rights and obligations for issuers of bearer notes and investors in them.

Investment management firm Secure Capital brought a claim against Credit Suisse for breach of contract over bearer notes issued by the bank, in which it held an interest. The longevity notes were linked to life insurance policies and payment was contingent on mortality rates amongst a set of "reference lives" related to the policies.

Secure Capital claimed the information provided in the issuance documentation was misleading because mortality tables used to generate the estimated life expectancies were shortly to be updated in a way that would significantly increase the life expectancies. This would render the notes worthless.

Handing down judgment, the CoA said the firm could not sue Credit Suisse for breach of contract, because it was not the bearer of the notes and the English law which applied did not allow any party which was not the bearer to issue a claim.

The CoA judgment agreed with the High Court, which granted Credit Suisse summary judgment in 2015. Both courts held that the notes were governed by English law and Secure Capital was not in a contractual relationship with Credit Suisse.

Financial litigation expert Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com, said Secure Capital argued that Luxembourg law – which governed settlement system Clearstream - gave it a statutory right to sue as if they were the holder of the notes.

However this argument was also rejected by the CoA, which said the only party with the rights to sue Credit Suisse was Bank of New York Mellon (BNYM), which held the notes as Clearstream's custodian.

“Credit Suisse could be sued in tort, but for whatever reason Secure Capital's claim was not pleaded that way,” McNeill said.

The CoA said: “In the case of immobilised securities, Clearstream and other settlement systems exist to facilitate efficient trading in interests in securities, not in the securities themselves. The fact that security issues are organised in this way so as to facilitate such trading is nothing to the point."

“Participants in the market know that they are trading in interests, not in the underlying securities. They are interests in contractual arrangements constituted by the notes and ancillary documents. The documents expressly provide for English law to be the proper law and expressly identify the parties who may either generally or in limited circumstances sue for breach of the terms of the notes. Those provisions are as much part of the package of rights as the payment terms and any other terms of the notes. Market participants trade in interests in that total package of rights,” the CoA said. 

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