Credit Suisse wins right to enforce contractual claims over derivative deals that were otherwise void

Dutch housing association Stiching Vestia Group (SVG) claimed that it bought 11 interest rate hedging products (IRHPs) from Credit Suisse without having the power to do so. It claimed the IRHP agreements with Credit Suisse were therefore invalid and sought to rely on that fact when Credit Suisse demanded payment of £65 million it said SVG owed.

The High Court ruled that SVG was right to claim that it had acted outside of the scope of its powers when it entered into six of the 11 IRHPs with Credit Suisse. However, Mr Justice Andrew Smith ruled that Credit Suisse was entitled to enforce all six of the invalid contracts under the master agreement it had put in place with SVG as if those six contracts were valid after analysing representations SVG had made to Credit Suisse about its ability to enter into those contracts.

According to the judgment, SVG agreed to buy 11 IRHPs from Credit Suisse between November 2010 and September 2011. Each IRHP was governed by a standard International Swaps and Derivatives Association (ISDA) master agreement signed in November 2010. ISDA master agreements are commonly used contracts that govern transactions concerning 'over the counter' derivatives.

When the market moved against SVG it was exposed to enormous costs on its IRHP portfolio. Credit Suisse terminated the IRHPs because SVG could not provide security for its mounting liabilities. Credit Suisse then claimed against SVG for the £65 million owed to it under the IRHPs at the point of termination.

SVG defended the claim on the basis that its articles of association prevented it from entering into the contracts with Credit Suisse and that those agreements were therefore invalid.

SVG's articles of association set out that the object of the organisation is to "operate exclusively in the field of social housing" and further outline a number of tasks it will undertake in fulfilling that object. As entering into IRHP transactions was not specified within its articles of association, SVG claimed that this meant it had no capacity to enter into those transactions with Credit Suisse.

Despite finding that six of the 11 IRHPs had been entered into by SVG without it having the capacity to do so, Mr Justice Smith said that those contracts were still valid. This was because SVG had represented to Credit Suisse in the ISDA master agreement that it was able to enter into those contracts. The judge said that Credit Suisse was entitled to "enforce the master agreement" as if the IRHP contracts that SVG claims it did not have the capacity to enter into "were valid".

Credit Suisse also brought an alternative claim against SVG for misrepresentation. It said if SVG did not have capacity to enter into the IRHPs it should not have represented in the ISDA master agreement that it did have this capacity.

Although Mr Justice Smith rejected the misrepresentation claim on the facts of this case, banking litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law.com, said that "there may nonetheless be circumstances in which banks would be willing to respond to a claim which contradicts contractual partners' representations by counterclaiming in misrepresentation. This is particularly the case given misrepresentation is an event of default under the ISDA master agreement which would entitle the bank to terminate the relevant hedges and possibly other related contracts and seek immediate payment of the terminated costs".