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

Author:Mr Richard Caird, Sam Coulthard and Alexandra Doucas
Profession:Dentons (United Kingdom)

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...

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