Credit Suisse International v Stichting Vestia Groep

In these proceedings Credit Suisse International (“Credit Suisse”) claim €83,196,829 from Stichting Vestia Groep (“Vestia”), a Dutch social housing association (“SHA”), as money due under an International Swaps and Derivatives Association (“ISDA”) 2002 Agreement (the “Master Agreement”), including a Credit Support Annex (“CSA”). Credit Suisse say that they duly terminated the Master Agreement on 19 June 2012 after Vestia had failed to provide security due under the CSA and that the Early Termination Amount that therefore fell due was €83,196,829. Vestia dispute the claim on the grounds that:

In their particulars of claim Credit Suisse plead alternative claims that they are entitled to €113,223,299 or €93,669,401 on the basis that only some of the disputed transactions were valid and binding on Vestia, but during the trial they elected to limit the principal amount of their claim to €83,196,829.

Vestia do not accept that the sum of €83,196,829 is properly calculated in accordance with the Master Agreement (even assuming that their other defences fail), and they put forward various other figures, the lowest of which was €73.7 million. This dispute did not emerge on the pleadings, but the parties agreed to it being included in the list of issues, where, however, it is couched only in general terms. The parties did not specify the differences between them in any detail in their openings, and the issues were not identified. The time allowed for the trial was in any case inadequate. I therefore decided to defer this dispute for later determination, if necessary. The parties agreed to this, or at least did not oppose it.

If their claim for €83,196,829 as money due fails, Credit Suisse have alternative claims:

It is convenient immediately to describe the transactions that give rise to the litigation. Credit Suisse say that between November 2010 and September 2011 they entered into eleven transactions with Vestia, nine disputed transactions and two others. Vestia say that the nine disputed transactions, although characterised by Credit Suisse as separate transactions, in fact comprise only five separate (putative) contracts, and that the issues about whether they were within Vestia’s objects and about Mr de Vries’ and Mr Staal’s authority are to be determined on this basis. I shall consider this contention later (at paragraphs 158ff),but in this judgment I use the term “transaction” as a useful label without pre-judging whether each transaction is a separate contract.

Transaction 1: Transaction 1 was an interest rate swap in the notional amount of €100 million. For Vestia it was a payer swap, under which they paid Credit Suisse interest at the fixed rate of 1.995% p.a. on a semi-annual basis and they received from Credit Suisse interest at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis. The trade date was 30 November 2010. The transaction had a forward effective start date of 1 July 2033, and a termination date of 1 July 2058.

Transaction 2: Transaction 2 was a “swaption”, whereby Vestia sold to Credit Suisse an option to enter into what would from Vestia’s perspective be a receiver interest rate swap. If the option was exercised, Vestia would pay Credit Suisse interest on €100 million at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis, and Vestia would receive from Credit Suisse interest on €100 million at the fixed rate of 4.5% p.a. on a semi-annual basis. Like transaction 1, transaction 2 had a trade date of 30 November 2010. The exercise date for the option was 29 June 2033, and, if Credit Suisse exercised it, the resulting swap had an effective date of 1 July 2033, and a termination date of 1 July 2058.

Transaction 3: Transaction 3 was a Constant Maturity Swap (or “CMS”) transaction, that is to say a swap under which one party (here Vestia) pays interest at a conventional fixed or floating rate (here a floating rate) on a notional amount in return for amounts that depend on the difference between two constant swap rates of different maturities (here two years and 30 years). The notional amount of transaction 3 was €100 million. The trade date was 16 March 2011, the effective date was 1 April 2011 and the termination date was 1 April 2026. Vestia were to pay interest at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis. Until 1 October 2015 they were to receive from Credit Suisse interest at the fixed rate of 5% p.a. paid semi-annually, and thereafter they were to receive interest which was to be paid and at a rate that was re-set on a semi-annual basis.This rate of interest was to be determined by the following formula: the lesser of (i) (a) 0.85%, plus (b) the 30 years’ Euro swap rate for the re-set date, and (ii) (a) 2.75%, plus (b) 10 times (α) the 30 years’ Euro swap rate for the re-set date minus (β) the 2 years’ Euro swap rate for the re-set date. It was subject to a “cap” of 6% p.a. and a “floor” of 1.5% p.a., giving Vestia some protection in respect of volatility of the amount to be paid under the structured leg of the CMS. (For the meanings of “cap” and “floor” see paragraph 44 below.)

Transaction 4: Transaction 4 was another interest rate swap in the notional amount of €100 million in similar terms to transaction 1. Vestia paid Credit Suisse interest at the fixed rate of 3.5% p.a. on a semi-annual basis and they received from Credit Suisse interest at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis. The trade date was 16 March 2011. It had an effective date of 3 October 2011, and a termination date of 1 April 2056.

Transaction 5: Transaction 5 was a “swaption”, whereby Vestia sold to Credit Suisse an option to enter into what would, from Vestia’s perspective, be a receiver interest rate swap, whereby, if the option was exercised, Vestia would pay Credit Suisse interest on a notional €100 million at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis, and Vestia would receive from Credit Suisse interest on the notional €100 million at the fixed rate of 3.5% p.a. on a semi-annual basis. It had a trade date of 16 March 2011. The exercise date for the option was 30 March 2026, and the resulting swap, if the option was exercised, had an effective date of 1 April 2026 and a termination date of 1 April 2056.

Transaction 6: Transaction 6 was originally executed on 8 April 2011, but it was re-structured and the re-structured transaction was executed on 16 June 2011. The notional amount was €50 million, the effective date was 1 May 2012 and the termination date was 1 May 2062: these features were not changed when the instrument was re-structured. Originally the transaction was a swap under which Vestia were to pay a fixed rate of 3.85% p.a. on a semi-annual basis and Credit Suisse were to pay interest at the 6 months’ Euribor rate, the rate being crystallised and interest being paid semi-annually. It included a provision under which either party had a right to terminate it at mid-market, which could be exercised on 8 April 2021 and every five years thereafter. Under the re-structured arrangement:

Transaction 7: Transaction 7 was another CMS transaction, and it had a notional amount of €50 million. The trade date was 16 June 2011, the effective date was 1 March 2011 and the termination date was 1 March 2026. Vestia were to pay interest at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis. Until 1 March 2015 they were to receive from Credit Suisse interest at the fixed rate of 5% p.a. paid semi-annually, and thereafter they were to receive interest paid on a semi-annual basis and at a rate re-calculated semi-annually according to the following formula: the lesser of (i) (a) 1.55%, plus (b) the 2 years’ Euro swap rate for the re-set date, and (ii) (a) 2.10%, plus (b) 10 times (α) the 30 years’ Euro swap rate for the re-set date minus (β) the 2 years’ Euro swap rate for the re-set date. Like transaction 3, it was subject to a cap of 6% p.a. and a floor of 1.5% p.a.

Transaction 8: Transaction 8 was another “swaption”, whereby Vestia sold to Credit Suisse an option to enter into what would, from Vestia’s perspective, be a receiver interest rate swap. If the option was exercised, Vestia would pay Credit Suisse interest on a notional €50 million at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis, and Vestia would receive from Credit Suisse interest on €50 million at the fixed rate of 3.55% p.a. on a semi-annual basis. It had a trade date of 16 June 2011. The exercise date for the option was 26 February 2026, and, if it was exercised, the resulting swap had an effective date of 1 March 2026 and a termination date of 1 March 2056.

Transaction 9: Transaction 9 was referred to as a “Callable Range Accrual Swap”, a range accrual swap being a swap under which one party (here Vestia) pays a conventional fixed or floating rate (here a floating rate) of interest on a notional amount in return for a fixed rate coupon that accrues only when a reference rate is within a specified range. Transaction 9 was executed on 16 June 2011, and its notional amount was €50 million. Its effective date was 1 March 2011, and its termination date was 1 March 2026. Vestia were to pay interest at the floating 6 months’ Euribor rate, the rate being crystallised and interest being paid on a semi-annual basis. Credit Suisse were to pay interest of 4.75% p.a. on 1 September 2011, and thereafter to pay interest paid semi-annually and calculated by reference to a “barrier” according to this formula: 4.55% (i) multiplied by the number of business days on which the 6 months’ Euribor was fixed at or below the barrier during the semi-annual period and (ii) divided by the number of business days in the period. The barrier was 4.00% from 1 September 2011 to (but excluding) 1 March 2014; 4.25% from 1 March 2014 to 28 February 2017; 4.50% from 1 March 2017 to 28 February 2020; 4.75% from 1 March 2020 to 28 February 2023; and 5.00% from 1 March 2023 to 28 February 2026. Each party had an option to terminate the transaction on 16 June 2021 on the basis of paying or receiving the mark-to-market value of the transaction. Credit Suisse also had the right to cancel the transaction on 1 March 2016.

I shall also describe the two other transactions between Credit Suisse and Vestia, which are not disputed and which Vestia accept were binding on them. They were both what are commonly called “plain vanilla swaps”, simple swaps of interest at a fixed rate on a notional loan for a floating rate of interest on the amount of the notional loan.

Thus, Credit Suisse and Vestia entered into what would, as separate transactions, be five plain vanilla interest rate swaps, three plain vanilla swaptions, two CMS transactions and the range accrual swap. Vestia contend that they agreed upon them in seven contracts:

The financial implications of the issue about how many separate contracts were made is demonstrated by this table, which briefly describes the nature of the transactions from Vestia’s perspective and shows what Credit Suisse calculate to be the amount of Vestia’s exposure to them as at 5 June 2014:

It will be apparent therefore that if, as I shall find to be the case, the disputed transactions are comprised in five contracts, the essential issues, subject to the notice defence, concern (i) the contract comprising transactions 1 and 2, (ii) the contract comprising transactions 3, 4 and 5, and (iii) transaction 6. Vestia recognise that the implication of their argument is that, if they have a capacity defence or an authority defence with regard to these three contracts, (i) the contract comprising transactions 7 and 8 and (ii) transaction 9 are also not binding on them, but it does not assist them to succeed only on either or both of these contracts.

I should say immediately that in one sense all the transactions certainly do constitute a single contract together with the Master Agreement. There is no dispute the Master Agreement (including the CSA) is valid and binding on Vestia, and it specifically provides (at section 1(c)) that:

“Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.”

The dispute about the number of contracts is about whether each transaction constitutes a single deal that is governed by and incorporated into the Master Agreement, or, in the terms of section 9(e)(ii) cited at paragraph 158below, a “supplement” to the Master Agreement.

Credit Suisse are a large, global investment bank, and among the services that they offer their clients are over-the-counter derivative products, including interest rate swaps and structured interest rate derivatives. They are an English company, and dealt with Vestia from their London office. They have three major divisions: the investment banking department, the equities division and the fixed income divisions. Their derivatives business is handled by the fixed income division.

Mr Garrett Curran is and was at the relevant times the Head of Fixed Income Sales for Europe, the Middle East and Africa (“EMEA”), and is now also the Chief Client Officer for EMEA and the Chief Executive Officer of Credit Suisse UK. Those involved with the “front office” dealings with clients including Vestia, reported to him. Their Credit Risk Management and their Legal Departments were, Mr Curran said, regarded as “middle office” functions.

I should explain the Dutch legislative and governmental background against which Vestia operate. SHAs play an important role in the Dutch housing market. They own about a third of the seven million residential properties in the Netherlands, and supply some three quarters of the residential rental market. In 2008 SHAs were for the first time required to pay corporation tax, and the explanatory memorandum about the change stated that, whereas SHAs had enjoyed an exemption because of their important role in social housing, the market had changed and SHAs had expanded their activities, for example by building more expensive properties for rent and sale and by investing in commercial property. Mr Gerardus Erents, who was the interim Chairman of Vestia’s Board of Directors from 1 February 2012 to 1 July 2013, explained that the range of their activities had been expanded to support their core purpose of providing social housing in that, with the approval of the Minister for Housing, Communities and Integration, SHAs had built a wider variety of properties in order that social housing might be included in more diverse developments and had built non-residential property in order to provide facilities in residential areas.

SHAs originated as private institutions in the Netherlands. In 1901 the Dutch government passed the Housing Act, which was intended to provide for regulation of the quality of housing, and to set rules for regulating the activities of SHAs. Section 70 provides:

“1.

Associations with full legal capacity and foundations, whose object is to operate exclusively in the field of public housing that do not intend to make payments other than in the interests of public housing, can be admitted by royal decree as institutions working exclusively in the interest of public housing.

2.

The admission referred to in the first paragraph can be refused or revoked by royal decree. The admission will in any event be refused if the association or the foundation does not satisfy the first paragraph or if the admission is not to be deemed in the interests of public housing. The admission will be revoked if the admitted institution no longer works exclusively in the field of public housing or makes payments other than in the interest of public housing.”

Between about 1950 and 1974 SHAs received state aid. In 1983 the Constitution of the Netherlands was amended to include a fundamental right to social housing. In that year the Dutch government announced a change of policy whereby SHAs were to raise funds on the capital markets for some purposes. The Waarborgfonds Sociale Woningbouw (the “WSW” or Guarantee Fund for Social Housing) was established to support SHAs with their financing arrangements. The WSW is a stichting, or foundation, and it is supported by central government, the municipalities and the SHAs. Its main purpose is to provide guarantees for SHAs’ liabilities so as to enable them to borrow at more favourable rates, and its funding is provided by SHAs collectively. In order to have its borrowings guaranteed by the WSW, a SHA must participate in it and comply with its rules.

In 1988 the Centraal Fonds voor de Volkshuisvesting (the “CFV” or Central Fund for Social Housing) was established. It is a public body, and it has the task of monitoring financial aspects of SHAs and helping to restructure SHAs which face financial difficulties. It has no power to intervene in the affairs of a SHA. (I accept the evidence of Professor Adriaan Dorresteijn, Vestia’s expert in Dutch law, about this, although it is contrary to the understanding of Credit Suisse’s Mr Sebastian Dupont.) The Housing Act (as amended) provides at section 71a as follows:

“1.

The [CFV]:

a.

provides subsidies to admitted institutions for the benefit of covering the financing of admitted institutions which do not possess the financial resources deemed necessary, or, according to regulations laid down by or pursuant to order in council, to be put toward the costs of activities of admitted institutions, and

b.

carries out tasks in the framework of the supervision of admitted institutions, insofar as those tasks have been stipulated by order in council, which tasks relate to the financial aspects of the activities of those institutions and which tasks can include providing Our Minister with insight into the financial situation of those institutions jointly.”

It also provides (at section 70d) that the Minister for Housing, Communities and Integration is to supervise admitted SHAs.

The permitted activities of a SHA were set out in the Besluit beheer sociale-huursector (the “BBSH”, or Decree on the Management of the Social Rental Sector), an order in council that was made in 1992 and came into force on 1 January 1993. (An Order in Council is, as I understand the evidence of Mr Michael de Groot, Credit Suisse’s Dutch law expert, secondary legislation broadly comparable for present purposes with a Statutory Instrument in the United Kingdom, albeit an Order in Council does not require Parliamentary approval.) Article 11 states the activities permitted for “admitted institutions”, that is to say SHAs admitted by royal decree under section 70 of the Housing Act. It provides:

“1.

The admitted institution operates exclusively in the field of social housing. It shall observe the provisions of paragraphs 2 through 6 when carrying out its work.

2.

…the field of social housing exclusively encompasses:

a.

the building, acquiring, encumbering and demolishing of homes and real property appurtenances;

b.

the maintaining of and the establishing of facilities for its homes and real property appurtenances and for homes and real property appurtenances of third parties;

c.

the maintaining and improving of the environment immediately adjacent to the homes and appurtenances referred to in part b;

d.

the managing, allocation and letting of homes and real property appurtenances;

e.

the alienating of homes and real property appurtenances;

f.

the provision of services to residents of homes managed by the admitted institution which are directly connected with residing in said homes, as well as providing services which are directly connected with the housing of said persons to persons who have indicated they wish to live in such a home; and

g.

the work which necessarily ensues from the carrying out of the work mentioned in parts a. through f.”

The Explanatory Memorandum that accompanied the BBSH commented on article 11(2)(g):

“Point g of paragraph two is intended to give only a limited expansion of the enumeration of parts a up to and including f of this paragraph. According to that point (“necessarily ensuing from”) it is not the intention to make it as such possible that admitted institutions are active in policy fields related to public housing. Such a broad application of that point would not be in accordance with the instruction laid down in Article 11, paragraph 1. Instead, these activities are those, without which the tasks referred to in parts a up to and including f of paragraph two could not be carried out. These include, for example, activities that from a technical or organisational viewpoint are indistinguishable from the activities in parts a to f of that paragraph, such as creating provisions on a shop premises of which the architectural shell forms an entirety with the house, or the building of houses in combination with shops because the zoning plan requires such.”

The Explanatory Memorandum identifies areas of what it calls accountability (“verantwoordingsvelden”), or performance fields (“prestatievelden”) as they are referred to in later ministerial circulars. As the Explanatory Memorandum makes clear, they are not defined by specific standards but they identify areas of activity in which institutions are required to use their best endeavours. The number of these areas or fields had by 2001 been increased from the original four to six. They include letting out of dwellings, managing the quality of housing, communications with tenants, “livability” (a concept that, I was told, defies translation but is directed to the improvement of the quality of neighbourhoods) and “housing and care”. More immediately relevant for present purposes, they also include the performance field of financial policy or financial management, matters that are not covered in article 11 of the BBSH but in articles 21 and 22. Those articles provide:

•

“The authorised institution operates a financial policy in such a way that its continuing existence is financially safeguarded”: article 21(1).

•

“The authorised institution will deploy all the resources it is not required to maintain in order to satisfy the first paragraph, in the interest of social housing”: article 21(2).

•

“The authorised institution allocates credit balances exclusively for activities in the field of social housing”: article 22.

The Explanatory Memorandum explains the generalised nature of these articles:

“The fourth field of accountability concerns financial policy. The State relies on the admitted institutions for a considerable part of its provision of social housing. The financial continuity of the social rental sector in the long-term is therefore of crucial importance to the government.

“The motives for the financial supervision of admitted institutions to date – in addition to the financial continuity of the social rental sector – lay also in limiting the financial risks that local authorities and the State had incurred in providing loans, guarantees and counter guarantees. Since the establishment of the [CFV] and the [WSW], the necessity for an intensive financial involvement on the part of the government has gradually decreased. Also in the context of privatisation, it is no longer appropriate to issue detailed regulations concerning the expenditure of the general operations reserve, the investment or the business management. Many of the rules in the financial field that existed in the Social Housing (Admitted institutions) Decree and the ministerial rules based on this have been therefore been cancelled. Also the local authority preventive competencies concerning decisions of corporations in the financial field – such as those found in Social Housing (Admitted institutions) Decree - have been omitted in the [BBSH].

“The basis of the privatisation is that admitted institutions have the ability to weigh up what is desirable in the context of their social purpose and what is justifiable based on their economic responsibility. Given the importance of the financial continuity of the social rental sector as a whole, it is expected of the individual admitted institutions that they justify this weighing up. In evaluating this justification, the starting point will be that the admitted institutions achieve where possible a cost-effective operation and business operation with all their activities.”

On 1 January 2011 there came into force a ministerial regulation called the “Temporary Regulation on Services of General Economic Interest Admitted Entities in the Field of Public Housing”. (It followed a European Commission investigation into whether the organisation of SHAs in the Netherlands complied with European rules about State Aid.) It defined the core activities of SHAs, but did not provide that they were excluded from other activities. In particular, by article 3 the Minister can allow SHAs to receive support from the Government for building or acquiring a building for a purpose that is not a core activity, provided that specified conditions are met. It makes it explicit that SHAs may have activities other than the core activities specified in the BBSH.

The Dutch Government has issued policy statements or ministerial circulars relating to SHAs, which are referred to as “MG Circulars”, and in which the Minister for Social Housing, Spatial Planning and Environmental Management (the “Minister”) has stated the policy by which he exercises powers conferred upon him (in particular under the BBSH) and which (as I shall explain) inform the interpretation of the BBSH.

In a circular of 20 July 1994 (MG 94-31), which is no longer in force but is said to elucidate article 21 of the BBSH, the Minister observed that some SHAs “may have entered into risky options contracts”, and under the heading “Investment policy of admitted institutions” said that “In view of the social task of the corporation, it must manage the authorised capital at its disposal in accordance with commonly accepted social standards (good stewardship)”. He continued, “… I deem an interpretation of the relevant articles of the BBSH and of the commonly accepted social standards that risky investments are permitted, as long as the financial continuity is safeguarded, to be incorrect”. He observed that options and other interest derivatives can be “necessary and valuable instruments in the framework of asset management, they are thus not excluded a priori for corporations”, but that some institutions had started to run increased financial risks. He then said:

“This forces corporations to effect an active asset and liquidity management. After all, having no policy and taking a waiting position with regard to market developments can also be very risky. It is therefore obvious that corporations will use the appropriate instruments to follow a policy whereby such risks are covered in a responsible manner, i.e. without open-ended constructions with a view to financial continuity. Investments with an open-ended character, on the other hand, are more a form of speculation. All kinds of financial constructions are possible, whereby the (potential) profits, but also the losses, increase the greater the risk … These kinds of activities are therefore not in the interests of public housing and are thus contrary to the law and the BBSH”

A circular of 23 December 1994 (MG 94-46) is also no longer in force, but it was considered by Mr de Groot to be of importance in understanding the Minister’s views. It is similar in its tenor to the circular of 20 July 1994. It said of activities such as those relating to “acquiring a financial interest”:

“When entering into activities, the question arises as to whether the activities are or are not in the interest of social housing. All activities performed by approved institutions must in any case fulfil the following three conditions:

-

be compatible with article 11 of the BBSH (effective in the domain of social housing);

-

the financial risks must remain acceptable (article 21);

-

fall within the geographic realm of the approved institution (article 7, clause 1a).

“Naturally, all activities must be in the interest of social housing and account must be given on the performance in terms of the four main areas of accountability.”

In a circular of 3 November 1999 (MG 99-23) the Minister wrote about the limits of SHAs’ “operating area” and about when “secondary activities” or “side activities” were proper. This circular introduced a requirement that proposals for some activities should be submitted to the Minister for prior approval:

“It has become apparent to me that situations arise in which extension of the activities are in the interest of social housing, particularly that of the policy’s target group. For example, it may seem necessary to [the SHA] that they provide more expensive homes to rent and buy, due to changing housing preferences and a restructuring of the integral social housing strategy, to customers outside its own circle of (potential) buyers and tenants. I consider these activities as side activities that are formally outside the operational area of the BBSH. ”

The Minister also wrote that:

“For the evaluation of side activities that fall outside the BBSH and that must be submitted to me in advance, it is an absolute requirement that these activities have a social housing character and relate to the key activities. In addition, I will apply the following criteria:

1

The [SHA’s] performance in terms of its key duties to social housing must be beyond any doubt. The evaluation will take into account the local authority’s opinion in function of the local social housing policy;

2

It is not sufficient for the [SHA’s] financial continuity to be beyond any doubt. The [SHA’s] side activities must also be restricted to acceptable and therefore limited financial exposure;

3

Side activities are designated as activities liable for tax.”

In a circular of 5 November 2001 (MG 2001-26) the Minister wrote further about “side activities”, expanding on the circular of 3 November 1999:

“Side activities are permitted to admitted institutions if they are activities that have a ‘housing’ nature. The side activities are only permitted if they have significant added value for the core tasks, which shall be demonstrated by the admitted institution and accepted by me. A side activity aimed exclusively at a financial gain for the admitted institution, for example, without there being any substantial and causal connection with one or more of the core tasks of the admitted institution, will therefore not be permitted by me.”

By the time relevant for the purpose of these proceedings SHAs had turned to using derivatives to manage their finances. In their annual report for 2008, the WSW wrote this:

“The treasury policy of housing associations has vastly improved over the last few years. Through active treasury management, associations seem able to respond well to the changing financial markets. Where once upon a time, it was customary to only raise capital in the markets when the organisation requested it, an increasing number of treasurers is now choosing to raise finance when their prospects are good. The active use of finance and interest risk management products enables them to handle the supply prudently and flexibly.

“The extreme developments on the capital markets and the volatile interest rates have prompted the Social Housing Guarantee Fund (WSW) to follow the derivatives positions of its members with even greater attention. Associations have created more security in relation to their interest expenses with the help of interest rate derivatives. However, using swaps and swaptions, for example, creates some other obligations, including the need to retain additional securities in the form of liquid assets, in order to cover any calls made by banks. The use of interest rate derivatives appears to be a good option, but any associations going down that road must have the necessary in-house expertise to retain adequate control over other (liquidity) risks.”

The extent to which SHAs used structured products can be seen in the loans supported by the WSW’s guarantees: in the 2010 report, it was said that of the loans with fixed rates of interest about a third (in number and a greater proportion in value) were by way of “structured bullet”, and so too were almost a quarter of the loans with floating interest rates. In their 2010 report the WSW also wrote:

“As a risk monitoring institute, WSW devoted considerable attention in 2010 to the way in which housing associations manage their derivative positions. This proved necessary once it became evident that some housing associations were unable to meet their margin calls from their own resources. In 2010, housing associations were only allowed a limited degree of exposure to liquidity risks in their derivative portfolios, while new transactions had to be reported to WSW at the end of each quarter.”

Vestia were founded in 1979 and have always been a SHA admitted under the Housing Act. They are the largest housing association in the Netherlands, and at the beginning of 2012 they owned some 90,000 houses and had over a thousand employees. They bought existing properties to rent, and also built new properties. Their properties were mostly residential, and were principally for their “target group”, that is to say for households with low incomes or special housing needs because of physical or other limitations. However, like other SHAs and for the reasons that I have explained, they also developed some mixed-use housing and, more recently, some purely non-residential property, and they sell property to persons outside their target group: for example, Vestia’s budget for 2009 anticipated that between 2009 and 2013 Vestia would build nearly 3,500 properties for sale and develop some 183,000 square metres for non-residential purposes. Nevertheless, the Board would certify in their reports that, “As this annual report shows, the Vestia Group only worked in the area of social housing, meaning that it met the requirements of Section 11 of BBSH”: their expanded activities, or “side” activities, were considered acceptable for a SHA.

Vestia are a foundation (or stichting), an unincorporated legal person. Article 2:285 of the Dutch Civil Code (“DCC”) provides:

“A foundation is a legal person created by a legal act which has no members and whose purpose is to realize an object stated in its articles using capital allocated to such purpose.”

This means that it has no general body of shareholders: the only managerial body prescribed by the DCC is the Board, although a SHA also has to have a Supervisory Board. It cannot convert itself into a different sort of legal entity without the court’s authorisation: see DCC article 2.18(4). The articles, and so the objects stated in the articles, can be amended only if otherwise they would have consequences that could not have been envisaged when the stichting was founded: see DCC article 2:294. Therefore, although there is no prohibition or limitation on Vestia making profits, the right to distribute them is very restricted (that is to say, only distributions with an “idealistic or social purpose” may be made to third parties: DCC article 2:285).

The objects stated in Vestia’s articles of association reflect closely the requirements of the Housing Act and the BBSH. Article 3 provides as follows:

1.

The foundation conducts its business in the whole of the Netherlands.

2.

The object of the foundation is to operate exclusively in the field of social housing.

3.

It endeavours to achieve its object with capital specifically assigned to this purpose by means of, inter alia:

- building and maintaining dwellings which meet the requirements of the day;

- acquiring, allocating, letting, managing, improving, encumbering; removing and demolishing dwellings and other objects;

- operating a socially just letting and allocation policy;

- helping to maintain a liveable residential environment;

- promoting a healthy living habitat;

- optimising the relations between the tenants and their representatives;

- cooperating with similar organisations at local, regional and national level;

- delivering a decent service and customer care to the tenants;

- deploying all appropriate resources which help to achieve the object”.

The only provision in the articles that refers explicitly to financial matters is article 13, which is headed “Finances and Administration”. It is as follows:

“1.

The financial year of the foundation runs concurrent with the calendar year.

2.

The board of directors is bound to keep such records of the capital position of the foundation that from these records the foundation’s rights and obligations can be deduced at all times. For this activity the regulations as determined by the minister must be complied with.

3.

The budget for the next financial year is to be adopted by the Board of Directors before 1 December of each year ….

4.

The annual accounts, the annual report and the social housing report is adopted by the Board of Directors before 1 June of each year ….

5.

Within six months of the end of the financial year the Board of Directors ensure that the annual account and report documents are sent to the relevant government institutions in compliance with the applicable laws and/or regulations”.

In 2002 Vestia adopted Financial Regulations (or “Financieel Statuut”: they were sometimes referred to during the trial as “financial policies”), which laid down a policy of treasury management. They described the objective and nature of the policy as follows:

“1.

General

Vestia Group’s core task is the letting and management of dwellings. It is a capital-intensive business that will face heavy investment, debt renewal and interest rate re-sets, particularly in the next few years.

The cost of the product is determined in particular by the cost of capital. In this respect, Treasury is a contributory factor to Vestia Group’s success in terms of public housing. It is therefore necessary to provide the financial regulations with an effective framework so that all involved are aware of their responsibilities and powers.

2.

Objective

The objectives of the financial regulations are:

-

To guarantee the financial continuity of the foundation

-

To maintain sufficient liquidity to ensure that the foundation can at all times meet its short-term commitments

-

To control financial risks

-

To establish the framework for the execution of treasury activities ...”.

The Regulations stated that interest rate risk policy was “the strategic framework within which the other policy areas (cash management, funding and investment policy) can operate”. It was to be “predominantly risk-averse”, and “Obtaining certainty on future operation is considered key”. The Regulations went on to make clear that this aim was to take priority over reducing overall funding costs. (“Certainty can be obtained by making the risk profile transparent and manageable. In this respect, the concepts of rentevisie (interest rate expectations) and rentemissie (interest rate target) play a significant role. For Vestia Group, no potential internal or external interest rate expectations are allowed to lead to a delay in entering into any necessary financial transactions. Therefore, interest rate expectations are subordinated to the interest rate target. With respect to timing of treasury transactions, interest rate expectations may be a factor for consideration”.)

As for “exposure”, the Regulations said this (under the heading “Maximum permissible exposure”):

“Linking the maximum amount of exposure to the amount of the loan capital requirements establishes the exposure’s maximum impact on the cost of capital. The annual exposure is set at 15% maximum of the expected loan capital requirements. This 15% can be seen as a limit at which a signal is given to the Treasury Committee. There it will be decided whether actions should be taken. Further, it should be noted that when determining the annual exposure, the interest rate risk should also be periodically reviewed over a rolling one-year period rather than over the calendar years highlighted in the reporting”.

This stipulation of a maximum exposure of 15% corresponds with the condition of participation in the WSW that at least 85% of the SHA’s loans are at a fixed rate.

The Regulations also considered financial instruments that might be used to structure the interest rate policy, and they included off-balance-sheet instruments. Of these the Regulations said the following:

“The nature of these instruments is often to fix or protect, rather than spread risk.

“‘Off-balance’ methods are employed to optimise the interest rate level of the annual exposure. This means that derivatives are used only if they have the characteristics of an insurance instrument, or for restructuring the interest-rate specific durations of the loan portfolio, provided that they fall within the designated risk parameters. Open positions that arise by, for example, writing options without being in possession of the underlying security, are not permitted. The instruments permitted include: options, caps, floors, collars, futures, future rate agreements (FRAs) and swaps. Combinations of the above-mentioned instruments are also possible provided that they do not increase the risk profile.”

I should also refer to what the Financial Regulations said about “Funding Policy”: they said that its general object was the “structural provision of financial means to guarantee the achievement of planned investments and the continuity of the operational activities in the long-term, at a minimal cost of capital”. They went on to observe that the cost of capital could be reduced by “focused duration management (subdivision of the loan portfolio into duration brackets)”.

In 2011 Vestia adopted new Financial Regulations, but Credit Suisse were not provided with a copy of them before the dispute that has led to this litigation. Generally the 2011 Regulations are similar to their predecessor. They state the goal of reducing Vestia’s overall funding costs, and with regard to the interest rate target state, “… the interest rates are observed in a historical perspective. In periods during which the interest rates are lower than the historic average interest rate percentages, more interest rate agreements will be entered into, where possible”.

The 2011 Regulations included as Annex 1 a memorandum dated 22 April 2009 and written by Mr de Vries with the assistance of Deloitte, then Vestia’s auditors. In it:

The 2011 Regulations also had a new section about “Hedge Accounting”, stating that “Vestia applies hedge accounting. This means that the cash flow risk resulting from interest rate risk will be hedged”. I shall come back to hedge accounting at paragraph 59below.

As I have already indicated, Vestia have, as well as their Supervisory Board, a Management Board, which is responsible for managing their operations including their financial and treasury activities and which is accountable to and reports to the Supervisory Board. Throughout the period relevant to these proceedings, Vestia’s Management Board comprised only Mr Staal, Vestia’s sole statutory director, until he resigned on 1 February 2012. The Supervisory Board comprised five people, some places being allocated for representatives of bodies such as tenants’ organisations.

Vestia’s Treasury Committee were responsible for their financial management, including their loan and treasury portfolios. Its membership at the time of the transactions was:

The only other employee of Vestia who was formally assigned to dealing with derivatives at the relevant times was Ms Marjolin Feteris, who was their Treasury Administrator. Other members of staff were sometimes used to cover her absences for illness. She mostly worked on a part-time basis. She was involved with “back office” administrative work, and had no part in negotiations and trading discussions with Credit Suisse or any other of the counterparty banks with whom Vestia dealt.

Mr de Vries’s responsibilities included borrowings, investments and hedging, and he had overall control of Vestia’s derivatives portfolio. He used a Bloomberg system for pricing derivatives, and from March 2011 he had had access to their SuperDerivatives pricing system, which was a sophisticated system for valuing derivatives trades. It is clear that he discussed the portfolio in general terms with Mr Staal and Mr Wevers, but unclear whether he discussed any individual transactions with them. He also spoke with the Supervisory Board about the portfolio and management of risk and cash flow, but only in strategic terms.

As the Financial Regulations state, the nature of Vestia’s activities meant that they were capital-intensive. They had large borrowings, taken out primarily in order to purchase and manage their properties. Their 2009 accounts, for example, reported loan obligations of some €3.8 billion, of which about €2.1 billion had a maturity within ten years and some €1.2 billion had a maturity in over thirty years. They paid floating rates of interest on some of this borrowing, and during the trial the focus was on the consequent risk from interest rate movements. However, this is not the whole picture: Cardano Risk Management BV (“Cardano”), who provide consultancy and advisory services particularly about solvency risk management, stated in a report (the “Cardano report”) written for the WSW and dated 9 December 2011 that in October 2011 Vestia had variable coupon borrowings of €1.104 billion, and larger amounts were described as “fixed coupon” (€1.813 billion) or as “structured” (€1.550 billion). I view this evidence with some caution: the Cardano report was written at a relatively early stage of their work with Vestia, and Cardano explained in it that they do not know whether all their information is correct and complete and that they have had “very limited turn-around time”. It might well be that that the proportion of floating rate borrowing had been higher, but it represented only part of Vestia’s portfolio.

The most important reason that I am sceptical about what Cardano said about Vestia’s borrowings is that it does not fit easily with evidence about Vestia’s borrowings that was given by Mr Richard Grove, who gave expert evidence about derivatives on behalf of Credit Suisse. He identified some 1,600 loan agreements, and said that “In at least 34 of these loan agreements, the interest payable by Vestia was calculated on the basis of a formula rather than on the basis of a fixed or floating rate such as EURIBOR”. This evidence (although about the number of loans rather than amounts) casts doubt upon what Cardano said about the volume of borrowing at structured interest rates. However, the fact that Vestia had such loan arrangements is more important than the volume. Of the 34 agreements which Mr Grove identified, ten provided that Vestia should pay interest calculated by reference to a spread between CMS rates: they had been entered into between 2003 and 2006. One of them had an option that allowed the lender to determine which rate Vestia should pay: either a CMS spread linked rate or the Euribor 6 months’ rate. I infer that the rates for the structured loans were not designed to be mutual hedges against each other: under all of them Vestia would benefit if the CMS curve were to steepen, that is to say if long-term rates were to increase in relation to short-term rates.

Against their borrowings, Vestia have substantial fixed assets, but many of them (the properties) are rather illiquid. Thus, in the words of the witness statement of Mr Erents, “Vestia’s borrowing liability at all relevant points of time partially involved an element of a floating interest rate, whereas its rental income was and is predominantly fixed and does not vary with movements in interest rates in the market. Through the numbers of tenants vary from time to time and rental levels change somewhat over time, the income flows which Vestia receives are and always have been generally steady and predictable”. Vestia therefore, as Mr Erents accepted in cross-examination, needed to manage their liquidity and cash flow carefully, and they used derivatives for this purpose. They first invested in derivatives in the late 1990s, and in 2001 they first entered into an ISDA Master Agreement. In 2005 they bought swaptions and entered into structured transactions, and in 2006 they entered into CMS transactions. By 2010, when they entered into their trading relationship with Credit Suisse, Vestia already had dealt in derivatives with other banks, including ABN/Fortis, Barclays, BNP Paribas, Citi, Deutsche Bank and Nomura. It is clear that they entered into trades with other banks of similar kinds to those with Credit Suisse that give rise to this litigation.

There is no dispute that SHAs generally and Vestia in particular could (and can) properly enter into derivative transactions in order to manage their finances, including their borrowing costs. By way of an obvious example, it is common ground that Vestia could properly enter into payer interest rate swaps (such as transactions 10 and 11) in order to pay fixed rate interest and receive floating rate interest so as to match their interest outgoings to the relatively fixed nature of their income.

All SHAs are required (by the BBSH) to state in their annual accounts that they have used their means exclusively for the benefit of social housing, and Vestia did so. In and before 2009 Vestia’s accounts were audited by Deloitte. KPMG were appointed their auditors for 2010 because Deloitte had acted as auditors for ten years. Their accounts described derivatives trading. Thus, their accounts for 2008 reported as follows:

The 2009 and 2010 accounts similarly stated the wide variety of derivative transactions that Vestia were making. For example the 2009 accounts list “plain vanilla interest rate swaps, cancellable swaps, interest index rate swaps combined with a cap and a floor, CMS structures with a cap and a floor, plain vanilla swaps combined with swaptions, caps, floors and (knock-in) collar (hedge wrapper)”, and said that these were used either on their own or in combination. In the 2009 Annual Report it was said that,

“Vestia has made use of the extreme volatility (instability) in the market. Vestia has received a lot of premiums by writing options with low strike rates (exercise of interest) within a year. This premium has been discounted in lower interest rates for existing swaps or in higher interest for receiver swaps. Vestia will receive a high interest in the latter variant. A majority of the written positions are bought back against a much lower premium in order to exclude the delivery risk and to secure the positions in real terms. These actions realised a profit of approximately €60 million which will find its way into the profit and loss account over the years”.

The 2010 accounts said that, “the largest part of the outstanding positions until 2010 has been fixed with derivatives. The structures were chosen in such a way that we pay a low interest rate comparable to the current low money market interest”.

Vestia had stated in their accounts from 2008 that they used hedge accounting in relation to their derivatives portfolio, and so this was apparent to the CFV, the WSW and others. I should briefly explain hedge accounting: counterparties entering into derivative transactions for hedging purposes can be required to account for them on a “fair value” basis, but the item being hedged might be brought into account on some other basis (for example, on a cost basis). This might result in a gain or loss on a hedged item being recognised although the effect of the hedge is that there is no gain or loss in economic terms. Accounting standards have been introduced to avoid this result, including provisions of the International Accounting Standards (“IAS 39”) and in the Netherlands the Richtlijn voor de jaarverslaggeving 290 Financiële Instrumenten (“RJ 290”). In effect they provide for consistent accounting treatment of the hedged item and the hedging instrument provided specified conditions are met, including (to cite IAS 39 paragraph 88(b)) that “The hedge is expected to be highly effective”, which means (inter alia) that it is expected that “The actual results of the hedge are within a range of 80-125 per cent” (IAS 39 appx 1 para AG105(b)): the ratio of the gain or loss on the hedged item to the gain or loss on the hedge must be no more than 125/100 (the larger number being a percentage of the smaller) and no less than 80/100 (the smaller being a percentage of the larger). IAS 39 also says this about when options might qualify as a hedging instrument for this accounting purpose:

“The potential loss on an option that an entity writes could be significantly greater than the potential gain in value of a related hedged item. In other words, a written option is not effective in reducing the profit or loss exposure of a hedged item. Therefore, a written option does not qualify as a hedging instrument unless it is designated as an offset to a purchased option, including one that is embedded in another financial instrument (for example, a written call option used to hedge a callable liability). In contrast, a purchased option has potential gains equal to or greater than losses and therefore has the potential to reduce profit or loss exposure from changes in fair values or cash flows. Accordingly, it can qualify as a hedging instrument.”

Only the 2011 version of the RJ 290 is in evidence, and this is not directly relevant to Vestia’s accounts in that their auditors did not approve the use of hedge cost accounting in 2011. I do not need to refer to its provisions in detail: it explained and exemplified the need for “effectiveness” with regard to the relationship between the hedged item and the hedging instrument, and I infer that earlier versions of RJ290 also did so.

It has been seen that both the Financial Regulations and the accounts refer to limit of 15% on interest rate risk. Mr de Vries’ understanding of the position is evidenced by a memorandum from him to Mr Staal and Mr Wevers dated 27 October 2004. He distinguished between the approach taken by the WSW, which was concerned only with the current loan portfolio, and a cash flow method that also took account of loans that were to be taken out in the future. With regard to the size of the interest rate risk, he wrote that:

“Vestia has a loan portfolio of €2 billion. The [Financial Regulation] and [the WSW] prescribe that no interest rate risk may run annually on at least 85% of the portfolio (=€1.7 billion). This means that on 15% of the portfolio, being €300 million, it is allowed to run a risk.”

Vestia’s internal documents demonstrate that Mr de Vries monitored Vestia’s interest risk exposure both by reference to the method required by the WSW and by reference to the cash flow method, and his working documents show that he did so over a ten year period (for example, in a memorandum of 4 February 2007 he set out figures about interest rate risk for each year from 2007 to 2017). I have pointed out that the accounts show that he bought hedging instruments to cover future borrowings as well as commitments already entered into.

Mr de Vries kept spreadsheets with details of Vestia’s overall positions in derivatives. His internal documents show that he was seeking to divide the loan portfolio into “duration brackets” as contemplated by the provisions about funding policy in the Financial Regulations. They apparently reflect an exercise whereby Vestia examined for some time in the future how loan liabilities were matched by interest rate swaps by analysing “buckets” of four months’ periods on a rolling basis so that different periods were examined for different years, and also for two months’ periods on a similar rolling basis. In 2009 Deloitte commented on this procedure without criticism: Mr Fonzy Chan of Deloitte wrote in an email to Mr de Vries on 21 April 2009 that he had noted “from yesterday’s discussion and overviews of swaps” that “Vestia is hedging the variable loans per payment month (Jan. Feb etc) and frequency (3 months’ or 6 months’ Euribor) with interest rate derivatives with similar properties”.

During and around the time of their relationship with Credit Suisse, Vestia’s dealings in derivatives increased both in terms of the number of trades and in their value. According to Mr Grove, in 2009 they had outstanding 226 trades with a total notional value of €10.61 billion; in 2010 they had 352 trades with a value of €17.35 billion; and in 2012 they had 414 trades with a value of €21.52 billion. The scale of their dealing in relation to their borrowings is illustrated in the Cardano report. It showed that in October 2011 Vestia had a portfolio consisting of about 400 derivative products with a total gross notional value of just over €23 billion. Their borrowings were some €5.367 billion. Cardano stated that “The fact that the derivatives portfolio is substantially larger than necessary to hedge the current loan portfolio is in line with the fact that Vestia anticipates the expected future loans”, and referred to a meeting with Vestia and the WSW on 2 November 2011. However, in my judgment this is unlikely to be the full explanation. I have already referred to Cardano’s express reservations: see paragraph 53 above. Mr Grove went further than Cardano in explaining why this level of investment in derivatives might be consistent with Vestia using them for hedging: that the notional amounts of derivatives used for hedging might exceed the borrowings also because the same lending might be hedged with an instrument with a forward starting effective date as well as a current hedge; because an entity might enter into receiver swaps to offset payer swaps that it had; or because they might be entered into in order to hedge cash flow risks. He also said in cross-examination that the relationship between the level of borrowings and the amount of derivatives reflects that Vestia’s hedging strategy was not to acquire a particular hedging instrument to match a particular borrowing commitment, but to acquire a portfolio of hedging instruments to provide protection against exposure in respect of the overall book of borrowings. He said this (when asked about a swap with a third party that Vestia had and that was said to be related to transactions 7 and 8):

“That payer swap wouldn't be hedging a single loan. I mean, it could be but in all likelihood it is not, because Vestia quite clearly is not hedging every position 1 to 1. I mean, I know that from having reviewed 1,600 loans with just, for argument's sake, roughly 5 billion euro outstanding principal amount and, even if some of those 1,600 loans have been prepaid, do the maths, the average [loan] size less than 5 million euro, whereas on the derivatives side we know that there is 775 derivatives with a notional amount of somewhere - call it for round numbers' sake 20 million euro, the average size of those derivatives is significantly larger.

“So clearly we cannot say that Vestia is never matching a loan and a swap 1 to 1. But overwhelmingly what they are doing is hedging on a portfolio basis … They have got a portfolio of loans and against that they have a portfolio of derivatives and they don't necessarily or even ever match 1 to 1.”

Credit Suisse called three witnesses of fact to give evidence: Mr Curran, Mr Dupont and Mr Julian Cathrew, a Credit Officer with Credit Suisse who has the title of Managing Director and works in Credit Risk Management.

Vestia called two witnesses to give oral evidence of fact: Mr Erents and Mr Jacques Greitemann. They also put in evidence a witness statement dated 16 August 2012 of Mr Maarten Bos, a consultant with Cardano. I understand that Credit Suisse did not wish to cross-examine him. A second witness statement of Mr Bos dated 28 March 2014 was not put in evidence. Vestia applied for permission to adduce it on the fifth day of the trial, but their application was opposed. I did not grant the application, but gave Vestia permission to renew it after one of Credit Suisse’s expert witnesses had been cross-examined. In the event, the application was not renewed.

I accept (as did Mr Rhodri Davies QC, who represented Vestia) that Mr Curran was an honest witness, and he did not deliberately mislead the Court. He clearly had much expertise in trading in instruments of the kind with which this litigation is concerned. However, he apparently found it difficult to confine himself to evidence of fact, and was very ready to give his own opinions about what would properly be for an expert witness and to present arguments that would properly be for counsel. I have found it difficult to extract admissible evidence of fact from many of his answers in cross-examination.

Mr Davies submitted that Mr Dupont had given dishonest evidence in cross-examination. I am driven to accept that, although this conclusion does not extend to the evidence that he gave through his witness statements. I explain below (at paragraph 134) why I reject his evidence about the conversation on 8 November 2011. At this stage, I give two further examples of his dishonest answers from his cross-examination about the WSW:

In the end, however, I do not consider that my assessment of Mr Dupont’s evidence is of great importance. Much of the dealings in which he was involved is in writing, and Mr Dupont’s important exchanges with Mr de Vries were in telephone conversations, which were recorded: they spoke in Dutch, but the parties were agreed on translations. Otherwise Mr Dupont’s most significant evidence, as I shall explain, was about what Mr de Vries had told him about arrangements that Vestia had with third parties in discussions before the transactions of 16 March 2011 (transactions 3, 4 and 5) and before the transactions of 16 June 2011 (restructured transaction 6 and transactions 7, 8 and 9): see paragraphs 93and 115below. Here Mr Dupont’s evidence is corroborated by that of Mr Curran and contemporaneous documentary evidence, and therefore, despite my assessment of Mr Dupont as a witness, I accept it.

I regard Mr Cathrew as an honest witness, but I consider that in some of his answers in cross-examination and re-examination he was driven to give answers for which he did not have any reliable information or recollections, and so I cannot always accept his evidence.

The evidence of Mr Erents and Mr Greitemann was largely uncontroversial and I consider it reliable.

The persons involved for Vestia with the transactions themselves, Mr de Vries and Mr Staal, did not give evidence for either party. I do not consider that I can draw any inference on any issues of fact from that. In Wisniewski v Central Manchester Health Authority, [1998] Lloyd's LR (Med) 223, Brooke LJ explained the principles that govern whether the court should draw adverse inferences against a party who has not called a witness with potentially relevant evidence on an issue: when there is no explanation for it, a witness's absence might go to weaken the effect of the evidence adduced on that issue (provided there is still "a case to answer" on it). Here it is readily understandable why Vestia did not call the evidence: Vestia have brought or intend to bring civil proceedings against Mr Staal and Mr de Vries, and additionally Mr de Vries faces criminal charges in respect of “kickbacks” that he is alleged to have received (albeit not in relation to these transactions or any transactions with Credit Suisse). They would not be likely to acknowledge that they acted without authority whether or not they did so. If either party might have been expected to adduce their evidence, it is Credit Suisse, but Mr Davies rightly did not suggest that I should draw any adverse inference against Credit Suisse.

Both parties called expert evidence of Dutch law. Vestia’s witness was Professor Dorresteijn, who is Professor of International Corporate Law at Utrecht University. Credit Suisse called Mr de Groot, who is a Dutch lawyer and a partner in the law firm of Lawton Advocaten in Rotterdam: his specialisation is in housing and public law. Neither claimed to have expertise in derivatives or in law specifically relating to derivatives. They had prepared written reports and also a joint memorandum of 10 January 2014 following a meeting on 18 December 2013, in which they recorded the extent of their agreement and summarised points of disagreement. I am grateful to both for their assistance, and do not doubt that both were seeking to assist me. However, I found Professor Dorresteijn’s evidence clearer and more consistent and balanced. The issues of Dutch law are about private law, and Mr de Groot’s particular expertise is in public rather than private law: in my judgment this might have led to some confusion in his reasoning, particularly in his first report, in which, as I explain at paragraph 193below, he put forward views that were not ultimately put to Professor Dorresteijn or advanced in Credit Suisse’s submissions. Mr Howe criticised Professor Dorresteijn on the basis that he overstepped the proper limits of the remit of an expert witness on foreign law, and expressed his own views about the applicability of principles of Dutch law to the facts of the case. I need not comment on this criticism, but even if it be justified, I do not consider that this significantly detracted from the quality of his other evidence.

The parties also adduced evidence from experts in derivatives. Mr Grove, whose evidence was called by Credit Suisse, has 30 years’ experience of dealing in the financial markets and since 2007 has been the Chief Executive Officer of Rutter Associates LLC, a New York firm that provides advice about financial markets risk management. He was the Chief Executive Officer of ISDA between 1997 and 2001. Vestia’s witness, Mr Jean-Robert Dulude, worked for the Royal Bank of Canada for some 20 years before in 2008 becoming a founding Principal of Valere Capital Partners LLP, who advise clients about their structured product and derivatives portfolios. I confess that at first I found Mr Grove’s evidence easier to understand and more persuasive, but, on re-reading his reports and the transcript of his oral evidence in the course of preparing this judgment, I have better understood Mr Dulude’s evidence. Both witnesses were seeking to assist the court, and both were very helpful. However, as I shall explain, to my mind Mr Dulude sometimes appeared to take too narrow a view of what transactions Vestia might properly make and this detracted from some of his evidence.

Finally, Vestia called as an expert witness Mr Dominiek Vangaever, who has wide experience of wholesale banking, and in particular setting up credit and risk management frameworks. He was a straightforward witness, but his evidence was of peripheral importance.

Credit Suisse’s Credit Department firstaccepted (or “on-boarded”) Vestia as a client in May 2007. Mr Jurgen Tulkens, Vice President of Credit Suisse’s Legal and Compliance Department, and Mr Alex Cauberg, Director of Fixed Income Derivatives in Credit Suisse’s Global Market Solutions Group, conducted the acceptance procedures. It was then envisaged that Credit Suisse might arrange a €50 million loan to provide Vestia with working capital, as well as enter into interest rate derivative transactions with them. In the event the discussions apparently broke down before a facility was arranged, and no derivative transactions were then concluded. However, Credit Suisse had received documentation about Vestia, including their Articles of Association, their 2002 Financial Regulations, financial projections for 2007 to 2015 and their accounts for the years ending 31 December 2004 and 2005. On 8 January 2007 Mr Tulkens had commented in an internal email, “for capacity and authority reasons it’s important for us to be aware of what type of business the counterparty will conduct with us (i.e. to hedge structured loans or not). An increasing number of Dutch housing associations have a treasury policy, which is documented in a separate document. If the counterparty has one in place, we should definitely obtain a copy at this stage”. Mr Cauberg replied that Vestia would “mainly” deal in interest rate derivatives in order to manage the interest rate risk on their liabilities, and their business would be of two types: interest derivatives to hedge their funding, including notes that they anticipated that they would issue, and “structured loans with embedded derivatives”. He also told the legal department shortly afterwards, in an email of 6 February 2007, that Vestia were a SHA and a not-for-profit organisation that had no shareholders (“It’s not really owned by anybody ...”), and that they were supervised by the WSW and the CFV.

Credit Suisse also took advice from Allen & Overy LLP’s Amsterdam office (“A&O Amsterdam”) about the “legal treatment of derivatives with housing associations in The Netherlands under the ISDA Master Agreement”. The advice, which was given in a letter dated 14 March 2007, was not specifically about Vestia. A&O Amsterdam advised that under Dutch law SHAs had capacity to enter into derivatives transactions that might be covered by an ISDA Master Agreement, subject to reservations to which I shall come shortly. They wrote, “We are not aware of any rules of general application to Dutch housing associations from entering into certain types of derivatives transactions a priori”.

Credit Suisse had received A&O Amsterdam’s advice in draft on 23 February 2007, and it had stated that, “Assuming that the Counterparty derives commercial benefit from the Transaction, and assuming that its articles of association include the entering into of hedging transactions, it is unlikely that the ultra vires provision could be successfully invoked”. In response Mr Tulkens said that, while Vestia’s statutes were silent on derivatives, their Financial Regulations dealt with when derivative transactions were allowed. A&O Amsterdam therefore asked for the Financial Regulations, and observed that “it remains important that the transactions are entered into for hedging rather than speculative purposes”. In the result A&O Amsterdam said this in the final version of their advice (and I set it out at length because it helpfully introduces some of the issues of Dutch law that rise between the parties):

“Other issues

8.1

Ultra Vires (corporate benefit)

Section 2:7 [of the DCC] gives legal entities the right to invoke the nullity of a transaction if such transaction entered into by such entity cannot serve to realise the objects of such entity and the other party to such transaction knew, or should have been aware, that such objects and purposes have been exceeded. Assuming that the Counterparty derives commercial benefit from the Transaction, and assuming that its articles of association include the entering into of hedging transactions, it is unlikely that the ultra vires provision could be successfully invoked by the Counterparty or its liquidator. Even without such specific reference to hedging or derivative transactions in the objects clause of the Counterparty’s articles of association, such Counterparty may still be supporting its main object(s) if it enters into transactions which are conducive to realise such objectives. Evidence of such support may be found, for instance, in internal treasury policy guidelines or other internal management policy guidelines which the Counterparty has adopted in respect of its policy on derivatives. If such policy guidelines specifically allow certain types of transactions under the Agreement, this could be considered additional evidence for the argument that the Counterparty was not acting ultra vires when entering into such transactions.

8.2

Restrictions in the articles of association

The articles of association (statuten) of a particular Counterparty may contain particular provisions in relation to the authorisation and execution of the derivative transactions and/or the provision of security in respect thereof.

8.3

Restrictions pursuant to the “Social Rent Sector Decree” (Besluit beheer sociale huur-sector)

This decree imposes certain restrictions on housing corporation [sic] as to their financial policy and management. They must follow a risk averse financial policy (risicomijdend financieel beleid) and the continuity of the corporation must be safeguarded (gewaarborgd). It is not clear what this exactly means. Policy guidelines give some guidance; financial risks should be acceptable and limited. Hedging of financial risks incurred in connection with its business is in our opinion allowed. Derivatives entered into for speculative purposes, on the other hand, will probably not be allowed. We would therefore recommend Credit Suisse make sure that the Counterparty is entering into each Transactions for hedging purposes.

8.4

Credit Derivatives –Insurance Contracts?

There is no Dutch case law or legislation available which gives an answer to the question whether a credit default swap should be qualified as an insurance contract in the Netherlands. Under Dutch law, in order for an agreement to be qualified as an insurance contract, the following conditions should be met:

1.

the contract holder should have an insurable interest in the underlying risk;

2.

a specified future event for which the insurance offers protection; and

3.

compensation of actual damage (i.e. contract holder should suffer a loss as precondition to payment).

In view of the conditions mentioned above we are – as a rule – of the opinion that a credit default swap does not qualify as an insurance contract under the laws of the Netherlands and accordingly the protection seller as obligor in respect of the credit protection payments would not be subject to insurance provision in the Netherlands if (i) it is not relevant for the credit default swap transaction that the Counterparty has exposure to the underlying risk, (ii) the credit default swap would be unaffected by the Counterparty ceasing to have exposure to the underlying risk during the life to the credit default swap and (iii) if there is no requirement under the credit default swap that the Counterparty should suffer a loss as pre-condition to payment (i.e. there is no connexity between the loss suffered and the payout). ”

By 15 May 2007 Credit Suisse’s “Client ID team” had given their approval for Vestia to be accepted as a client, but, as I have said, they did not do any business with Vestia for some time. However, by the end of 2009 Credit Suisse had decided to expand their fixed income sales business and identified SHAs as an area for potential growth. They recruited Mr Dupont, a Dutch-speaking Belgian, for this purpose. He had previously worked for Nomura and had advised the WSW, and so had some knowledge and experience of Dutch SHAs. He had come into contact with Vestia when he was at Nomura: while he was there, Nomura had entered into an ISDA Master Agreement with Vestia, the first transaction under it being in about January 2009. Following an approach by Credit Suisse, Mr Dupont joined them on 1 September 2010. He was given the title of Director and appointed to the Fixed Income Division of Credit Suisse in what was then called their Public Sector team; Credit Suisse regarded SHAs as “public sector” clients. Mr Dupont reported (at least at the relevant times) to Mr Jim Wachsmann, a Managing Director and co-head of Credit Suisse’s European Insurance and Pension Solutions team. Mr Wachsmann in turn reported to Mr Curran.

When Mr Dupont joined Credit Suisse they had entered into an ISDA Master Agreement with only one SHA. In his first year with them Credit Suisse made ISDA Master Agreements with four more SHAs, including Vestia, who were the first SHA to secure a credit line with Credit Suisse and to enter into transactions with them under a master agreement. Credit Suisse reviewed their 2007 “on-boarding” of Vestia, inter alia by obtaining another copy of their Articles of Association, and their accounts for 2007 and 2009. Mr Dupont believed that they also obtained the 2008 accounts, and I conclude that they probably did: there was no reason for Vestia not to provide them with the other accounts.

Mr Dupont had already met Mr de Vries before joining Credit Suisse. He regarded Mr de Vries as sophisticated in the use of derivative products and as having a good technical understanding of them. He knew that he had access to advanced software to review the market and to assess potential transactions. According to Mr Dupont’s evidence, in his experience Mr de Vries had rejected proposals that he thought risky or uncertain, and Mr Dupont understood that he was keen not to expose Vestia to “open-ended” risks. As I have explained, I do not regard Mr Dupont as a reliable witness, and I do not rely on that evidence. However, Mr Dupont did initially expect that the greater part of Vestia’s business with Credit Suisse would be by way of “vanilla interest rate hedges”. This is reflected in an email that he sent on 20 December 2010 to Mr Fawzi Kyriakos-Saad, the Chief Executive Officer of Credit Suisse in Europe: “The majority of trades we anticipate would be vanilla interest rate hedges …. Any more complex transaction would go though special transaction review process so would be reviewed on an individual basis”. (I shall explain later the “special transaction review process”: see paragraph 99below.)

Under Credit Suisse’s procedures, their Credit Risk Management (“CRM”) department had to assess a potential counterparty and manage Credit Suisse’s exposure. Counterparties were given a rating and credit limits for them were set. The Dutch housing association sector was rated “AA” with a stable outlook, and in 2010 and 2011 Vestia’s rating was “AA”. The Credit Officer responsible for accepting Vestia in 2010 was Ms Marie-Helene Blattmann, who, as was explained by Mr Cathrew, specialised in “sovereign/semi sovereign clients across Europe”. On 12 October 2010 she approved a credit limit of $80 million for Vestia, and this was later increased on 3 August 2011 to $85 million and again on 9 September 2011 to $100 million.

Mr Dupont arranged for Mr de Vries to come to London for meetings with Credit Suisse on 26 October 2010 and 17 November 2010. At the first meeting Mr Dupont introduced him to Mr Curran and representatives of Credit Suisse’s Credit Department. As Mr Curran understood it, the purpose of the first meeting, which lasted 20 or 30 minutes, was that, as a new client, Mr de Vries might, as a matter of courtesy, meet a more senior officer of Credit Suisse. Mr de Vries appeared to Mr Curran to have a good understanding of treasury risk management and to be “comfortable” with more complex types of dealing. Mr Curran recalled that Mr de Vries indicated that Vestia had floating debt of some €5 billion, and a derivatives portfolio of €18 billion, under which Vestia paid fixed rates of interest on about €10.5 billion and received interest at fixed rates on about €7.5 billion, and Mr Curran thought a portfolio of this size reasonably commensurate to Vestia’s floating debt. He also recalled that Mr de Vries told him that Vestia used swaps, swaptions, CMS swaps, range accruals and other structured instruments, and he understood that they dealt with several counterparty banks. According to Mr Dupont, Mr de Vries expressed interest in learning about what products Credit Suisse might provide other than straightforward (“plain vanilla”) swaps between fixed and floating interest rates and options for such swaps, and he said that he was looking at investing in forward starting swaps (to start in 20 to 30 years) because the rates were very low, and Vestia wanted to switch their future long-term liabilities from floating to fixed rates at what were historically low rates. Mr Dupont said that he presented different ideas to Mr de Vries, including that Vestia might enter into an option for a forward starting swap: in an internal note of 27 October 2010 Mr Dupont wrote that Mr de Vries “wanted to know more about” that idea and that Credit Suisse should “follow up with some material and indi[cative] pricing”.

At the second meeting on 17 November 2010 Credit Suisse (in Mr Dupont’s words) “took the opportunity to elaborate on the ideas that had been discussed”. The purpose of the meeting, he said, was to illustrate to Mr de Vries that Credit Suisse could assist Vestia in managing their interest rate exposures.Mr Curran met him briefly and recalled a “high-level discussion about markets”.

The Master Agreement was dated “as of” 9 November 2010. Credit Suisse conducted the negotiations primarily through their Legal Department: they considered the advice given by A&O Amsterdam in 2007, but did not take any external advice specifically about Vestia. A&O Amsterdam handled the negotiations for Vestia. Mr de Vries sent the signed Master Agreement to Credit Suisse by email on 30 November 2010. The Master Agreement stated in the standard ISDA wording that Credit Suisse had “entered into and/or anticipated entering into one or more transactions (each a Transaction) that are or will be governed by this 2002 Master Agreement, which includes the schedule and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the purpose of confirming or evidencing the Transactions”. It comprised a schedule, which in turn had annexed to it the CSA. Under it Vestia were to transfer collateral if their “mark-to-market” exposure under the transactions conducted under the Master Agreement exceeded a threshold of €100 million. At the same time, Vestia provided to Credit Suisse a Management Certificate signed by Mr Staal, which I set out and consider at paragraph 290 below.

By 30 November 2010 Mr de Vries had approached Mr Dupont with a view to discussing (to adopt the words of Mr Dupont’s witness statement) “a trade in the terms” (emphasis added) of what became transaction 1 and transaction 2. Mr de Vries told Mr Dupont that he had previously entered into similar arrangements with other banks. On 30 November 2010, the same day as the signed Master Agreement and Management Certificate were received by Credit Suisse, Mr de Vries and Mr Dupont had further discussions by telephone, which ended in them agreeing upon the terms of transactions 1 and 2. In them Mr Dupont suggested to Mr de Vries that, if Vestia entered into a swap arrangement with Credit Suisse, they could at the same time enter into a swaption (“do an overlay”). Mr Dupont explained in his evidence that he did so because Mr de Vries had expressed a wish to “lock in this low forward point in 23/25 years’ time”: that is to say, to try to exploit what were perceived to be low market rates. Initially Mr Dupont had tried to suggest this in a text message, but apparently Mr de Vries did not receive it, and so he explained his idea on the telephone in a conversation between 8.41 and 9.09. Referring to the premium that Credit Suisse would pay for the swaption, Mr Dupont told Mr de Vries that “you can get a huge amount of money because the volatility is so high”, and he proposed that this could be used to reduce the coupon on the swap. This set the structure for transactions 1 and 2. Mr de Vries later asked that the terms about the strike price of the proposed swaption (transaction 2) be changed (from 4% to 4.5%), which meant that the strike price was further “out of the money”, and so less likely to be exercised by Credit Suisse. The premium that Vestia were to receive by way of the terms of the swap, transaction 1, was therefore reduced. (Mr Grove calculated that without the swaption the fixed rate for the swap would have been 2.18%, rather than 1.995%.)

Credit Suisse rely on an exchange about this in a telephone conversation between Mr Dupont and Mr de Vries between 13.40 and 13.42 on 30 November 2010:

“Dupont – Okay, yeah, so 1.995.

De Vries – I get an extra half point so it goes down one and a half points.

Dupont – I’ll go down one and a half points, okay. And we’re doing it to say it specifically. 1 July 2033 up to and including 1 July 2058. 25 years. 6-month coupon, actual three sixty, six-month coupon. Vestia pays Credit Suisse 1.995% for a hundred million.

De Vries – Yeah.

Dupont – And over and above that Vestia sells us a swaption, so an option on a swap that begins on 1, so the same start date, so it starts on 1 July ’33 …

De Vries – The same term.

Dupont – Exactly the same term to 1 July ’58; again six months actual three sixty?

De Vries – Yeah.

Dupont – Okay. Whereby, we, Credit Suisse, have the right to pay you: 4.5% coupon.

De Vries– Yeah.

Dupont – Okay?

De Vries– Yeah.

Dupont – Okay, then I’ll now speak with my trader and try to put it on but it should not normally be a problem. Okay? And then I’ll let you know.

De Vries– That’s nice.”

The terms were agreed, and later that afternoon Mr Dupont left a voicemail message for Mr de Vries telling him that Credit Suisse’s traders had “made the trade at the conditions that we discussed”. Credit Suisse then sent to Vestia a document setting out “Final Indicative Terms and Conditions”. One document was sent in respect of both transactions 1 and 2, and it was headed “Swap and Swaption”. It set out separately the terms of the swap (transaction 1) and the swaption (transaction 2). At the end it stated “Credit Break: After 10 years and every 5 years thereafter”. In the covering email addressed to Mr de Vries Mr Dupont referred to both the “transaction” and the “transactions”: “Many thanks for today’s transactions. We are very happy that we could close our first transaction with you”. Mr de Vries replied, “I agree with the confirmation”. On 6 December 2010 Mr Dupont sent an internal email to in which he described the deal for transactions 1 and 2 as his “first transaction” with Vestia.

The value to Credit Suisse of the two transactions was just over $2 million, or $1.7 million net of a “credit value adjustment” (or “CVA”), which essentially was an adjustment required by Credit Suisse’s valuation procedures made in order to reflect the counterparty credit risk posed by the transaction with Vestia, measured by reference to what Credit Suisse would be expected to pay to eliminate it by replacing Vestia with a (notional) counterparty who was entirely “risk-less”.

I should come back to the telephone exchanges on 30 November 2010. They reflect that Mr de Vries alone was in control of Vestia’s portfolio of derivatives, and make clear that Mr Dupont knew this. Thus,

On 16 December 2010 Credit Suisse sent to Vestia a letter about transactions 1 and 2. It started, “The purpose of this letter agreement (“this “Confirmation”) is to confirm that terms and conditions of the Transaction entered into between us on the Trade Date specified below (the “Transaction”). This Confirmation constitutes a “Confirmation” as referred to in the [Master Agreement]”. It went on to state, “The terms of the particular Transaction to which this Confirmation relates are as follows”, and set out the terms of both transaction 1 and transaction 2. It said nothing about the “Credit Break” referred to in the Final Indicative Terms and Conditions. At the end it asked that Vestia “confirm that the foregoing correctly set out the terms of our agreement by signing and returning this Confirmation”. Vestia returned the Confirmation countersigned by Mr Staal on 19 January 2011. (There was apparently an error in the terms of the confirmation, which Credit Suisse noticed on 15 May 2012. They asked Vestia to provide a revised confirmation, but Vestia declined to do so. To my mind, nothing turns on this.)

This is the pattern of exchanges followed in subsequent dealings: Mr de Vries and Mr Dupont would discuss and arrange terms of the transactions by telephone. Credit Suisse would send Vestia a document setting out “Final Indicative Terms and Conditions”. Then, sometimes quite a while later, Credit Suisse would send Vestia a Confirmation letter, which Mr Staal would countersign and return.

On 5 January 2011 Mr de Vries and Mr Dupont spoke by telephone. Mr de Vries said that in one week he had done a large amount of business by selling options worth a total of €1.5 billion by way of 50 years’ swaps with a strike date within a year. Mr de Vries said that in this way, “You can really make a fast buck”. Mr Dupont told me that he did not consider trading of this kind to be “very risky” if the strike price was properly pitched. The conversation continued with Mr de Vries saying that he had earned $55 million from dealings with Citigroup alone and that “you don’t get so much trouble with your hedge accounting” through deals of that kind: Mr Dupont understood that Mr de Vries was speaking of selling options with an exercise date before the end of the year in order to avoid having to explain to auditors what he was doing, and to my mind that understanding was correct. It is corroborated because Mr de Vries also said that “the annoying thing is that I am of course being asked now: how does this all fit in with your hedge?”

On 17 January 2011 Mr Curran and Mr Dupont, together with Ms Jenna Victoriano, who was then Credit Suisse’s Head of Anti-Corruption Compliance in Europe, the Middle East and Africa, had a meeting with the WSW. Its immediate purpose was to discuss with the WSW the use by SHAs of “finders”, local agents whose business is to effect introductions. Vestia were not introduced to Credit Suisse through a finder, and the discussions had no immediate relevance to Vestia. Mr Curran’s evidence was that at the meeting he gleaned from the WSW that they were comfortable about SHAs using derivatives, including swaptions and structured derivatives. However, on 18 January 2011 Ms Victoriano sent an internal email by way of a record of the meeting, and reported that the WSW conducted a quarterly review of derivative transactions, and liked SHAs to bring more complex transactions to them for review and prior approval, although they did not see all such transactions. I conclude that this is more likely to be an accurate account of what the WSW said than Mr Curran’s recollection.

According to Mr Dupont, he and Mr de Vries had their first discussions that led to the next transactions between Credit Suisse and Vestia (transactions 3, 4 and 5) when they met in Rotterdam on 27 January 2011. Mr Dupont recalled being told by Mr de Vries that Vestia had (i) a loan with an unnamed third party (the “third party loan”) with a fixed coupon of 5%, a rate above the market; and (ii) a swap with a third party (the “third party swap”) under which Vestia were to pay a fixed rate of 2% in exchange for a floating rate, and which was “forward starting” with a start date in 15 years’ time and for a period of 30 years. As I have said, although I do not regard Mr Dupont as a reliable witness, this evidence is corroborated by that of Mr Curran (see paragraph 101 below), and I accept it. I also accept that Vestia did indeed have such arrangements with third parties: there is no apparent reason that Mr de Vries should have given Mr Dupont false information of this kind. Mr Dupont described the third party loan as “the context” in which the parties entered into transaction 3, and the third party swap as “the context” in which they entered into transaction 5. As I understand it, the connection between the third party loan and transaction 3 is that Mr de Vries explained that he was looking for an arrangement to “reduce the coupon” on the third party loan, and a commercial effect of transaction 3 was that the 5% coupon was covered until 2015 and Vestia were to pay a floating Euribor coupon.

Was there a rational link between transaction 5 and the third party swap (as, according to Mr Dupont, it was described by Mr de Vries)? Viewing the transaction in the context of Vestia’s dealings with Credit Suisse, the position is this. If Credit Suisse exercised the swaption, it effectively would off-set both the legs of the swap (transaction 4) and would have no impact on the third party swap. If Credit Suisse did not exercise the option, then it would not affect the commercial impact of transaction 4: between 2026 and 2056 Vestia would pay Credit Suisse a fixed rate of 3.5% and Vestia would receive a floating rate. Similarly under the third party swap, Vestia would be paying a fixed rate of interest and receiving a floating rate: both would increase Vestia’s exposure to interest rate movements. However, Mr Dupont said that he understood the rationale to be that the swaption should “overlay” the third party swap (as transaction 2 “overlay” transaction 1), and this explanation seemed cogent to Mr Curran: see paragraph 103 below.

At the meeting Mr Dupont had presented to Mr de Vries two ideas for possible transactions; (i) a CMS linked swap with or without a swaption, and (ii) an algorithm linked swap, a suggestion that was not in the end taken up. On 15 February 2011 and then on about 15 March 2011 Mr Dupont followed up his suggestions by sending Vestia further presentations of them. (The March presentations were dated 14 March 2011, but the documents indicate that they were first sent on 15 March 2011. Apparently Mr Dupont and de Vries had spoken about them before they were sent: they were emailed under cover of a note “As discussed”). According to the agreed translation of the Dutch, an executive summary described the proposals as follows:

“In the following pages we propose two structures which will enable Vestia to make a gain from the high volatility in the interest rates market as well as the strongly inverted CMS 30-2 forward curve”

(In his cross-examination Mr Dupont was unhappy with the translation that Vestia could “make a gain”, and preferred as a translation “obtain an advantage”. Nothing turns on this, but there was no sufficient evidence or other proper basis that would allow me to depart from the agreed translation.) The benefit to Vestia from the CMS arrangement, it was suggested, would flow from movement in the Euro yield curve, the patterns of interest rates for Euro borrowings for a range of maturity dates, and here specifically the 2 years’ rate and the 30 years’ rate. It might be expected that the yield would reflect the risk attached to long-dated borrowings, and so that interest rates would be higher: in the language of the market, that the yield curve would be upwards sloping. Historically this had usually been the case. (Mr Grove described different theories that explain this, but I do not need to go into them.) In March 2011 the curve for 30 years’ and two years’ rates was “negative” or “inverted”: that is to say, the short-term rates were higher than the long-term rates. The rationale for the proposed CMS arrangement was an expectation that the market would move to the historically more usual pattern. Of course, the rate that Vestia would receive would depend on the performance of the CMS formula, but Mr Dupont said in cross-examination that:

“… there was a high likelihood that the market would work in its favour because Vestia would receive the high coupon if the 30-year rate is above the two-year rate and basic micro economics tells you that obviously it is more risky to lend somebody money for 30 years than it is for two years. So in all normal market circumstances, the 30 years will be higher than the two-year rate, i.e. Vestia would have received a large - a high coupon in all normal market circumstances.”

The proposal was that Vestia would receive interest of 5% for the first five years and then be paid interest calculated according to the CMS formula.

Mr Dupont also proposed that Vestia sell Credit Swiss a swaption, which was to start in 2026 and have a 30 years’ term. Mr Dupont envisaged that it would “come on top of” an existing payer swap in Vestia’s portfolio. This was said in the written presentation: “The option premium that Vestia would receive for this in combination with the position that CMS 30-2 curve is assumed not to be negative in the forwards, allows Vestia to build up a very attractive coupon structure for 15 years”. Mr Dupont gave an explanation in his evidence of what he meant by this: that, as the market then was, Vestia would have to pay for a simple swap to match a loan in their portfolio on which they were paying 5%: they were to do that by entering into what was to become transaction 3. The idea was to sell the swaption (transaction 5) in order to increase the coupon that Vestia were to receive under the CMS arrangement sufficiently to cover the interest that they were to pay to the third party.

After the presentation had been sent, Mr Dupont and Mr de Vries discussed it by telephone at 14.20 on 15 March 2011. In their exchanges Mr de Vries specifically sought, and was given, confirmation that the payer swap had “precisely the same end date as the swaption”.

Before entering into the proposed transactions, Mr Dupont needed the approval of Credit Suisse’s Credit Department. Internal emails show how the proposals were viewed by those responsible for Credit Suisse’s “risk management modelling”. Mr Lokesh Khiani enquired whether the three transactions were “happening as a structure or individually” and was told that they were proposed “as a structure”. (That description did not come from Mr Dupont, but he was party to the email exchange.) The “net risk” of the package of three transactions was calculated: at “present value” the CMS transaction was calculated to lose Credit Suisse just over $3 million, the swaption was calculated at present value to produce a profit of nearly $8 million and the swap to produce a profit of some $1.2 million. (The CMS transaction taken in isolation was loss-making for Credit Suisse, of course, because the premium from the swaption was deployed to improve its terms for Vestia.) Net of CVA, which was said to be just over $1.3 million, Credit Suisse’s overall profit from the three transactions was some $6 million. Mr Curran confirmed that these calculations were carried out on the basis that all three transactions went ahead and, if any one of them did not do so, Mr Dupont would have required different calculations by way of risk management modelling.

Mr Curran became involved with specific transactions with Vestia through the procedures that Credit Suisse’s Financial and Institutional Solutions Group had for “non-standard transactions”, that is to say (according to Credit Suisse’s manual) for transactions that carried “potential Reputational Risk issues and/or particular market or franchise risk”: the procedures were designed to avoid transactions which might lead to disputes or otherwise harm Credit Suisse’s reputation. Mr Dupont had to present such transactions for the approval of Mr Curran and Mr Wachsmann. Mr Curran explained that in these cases he would “check broadly whether the transactions made commercial sense from the client’s perspective and that they did not involve an unacceptable degree of risk for the client”. He considered transactions less risky if they resulted from a “reverse enquiry” (if the client had approached Credit Suisse with a proposal), and if the client’s exposure was limited because the transaction had a “cap” or a “floor” or both. If a transaction was approved as “non-standard”, Credit Suisse put in place various controls after it was executed: that (i) valuations were sent to both the front and the back office; (ii) the salesperson had to have the documents stored on a particular database; and (iii) it was to be reviewed monthly with Credit Suisse’s Compliance department.

Through these procedures Mr Curran was twice involved with disputed transactions with Vestia: on 16 March 2011 and on 16 June 2011. Mr Dupont understood that these procedures had to be followed because Vestia were a public sector counterparty and because of the expected “attributable revenue from coverage”. On the first occasion Mr Dupont sought his approval for transactions 3, 4 and 5 (Mr Curran said in cross-examination that Mr Dupont could properly have excluded the swap from the request for approval because it was not “non-standard”, but nothing turns on that), and Mr Dupont sent Mr Curran an email to explain the proposals: “The transaction consists of a package of trades each of which consist of a hedge for the client. Additionally, the client does not have an open exposure as the transaction is capped and floored conservatively”. He said that “The transaction” was “a bespoke product created for Vestia, which had been revised several times on Vestia’s instructions”, and that it had three “legs”, which he described:

According to Mr Curran, he asked Mr Dupont to come and explain orally the “logic behind” the CMS and the swaption. They had, Mr Curran told me, a brief discussion: he did not claim to recall it clearly, but thought that he asked Mr Dupont why it was proposed that Vestia would receive the high fixed coupon until 2015 and Mr Dupont replied that Vestia had explained that they had a loan from a third party on which they were paying a fixed coupon of 5%: it would be covered by the 5% coupon that Credit Suisse were to pay under the CMS leg for the first period.

In one of his witness statements Mr Curran said that:

Mr Curran was much pressed in cross-examination to accept that the Euribor payments under the CMS transaction and the swap would “net out”. In one sense of course they do, but Mr Curran was unwilling to accept that this was the proper way to view the transactions: he supposed that the different legs of the proposal corresponded with transactions with third parties that Vestia had in their portfolio. He accepted that, if the swaption were exercised, its terms would “match” those of the swap, but insisted that this was not a realistic way of considering the transactions because “any treasurer” would be looking at the overall pattern of his portfolio and consider the net impact on it of the transactions. In particular, he supposed that Vestia were receiving Euribor against a coupon of 2% under the third party swap and against a coupon of 5% under the third party loan. He took it that a professional counterparty would know whether transactions fitted with their portfolio and considered that the proposal could do so. He was therefore satisfied that the proposal did not expose Credit Suisse to financial or reputational risk.

Mr Curran also said in his witness statement that he “noted that the transaction was capped and floored (so that Vestia’s exposure would be limited)”. On the face of it, this is strange: under the CMS formula, the cap and floor attached to what Credit Suisse were to pay to Vestia. Mr Curran sought to explain, as I understood his cross-examination, that he took it for granted that Vestia had exposure with a third party that corresponded to the fixed leg of the CMS. I found that evidence puzzling: it is simply not what his witness statement said. But in any case I do not rely on what Mr Curran assumed as evidence of what exposure Vestia had to third parties, or that they had exposure with a cap and floor that corresponded with those in the CMS transaction.

On 16 March 2011 Mr Dupont and Mr de Vries had several telephone conversations and they reached agreement on the terms of transaction 3, transaction 4 and transaction 5. In a conversation at 14.20, which Mr de Vries conducted from a car, Mr Dupont explained that Credit Suisse had had to change “one small thing” in the terms discussed in order to “arrive at the 3.5% for you, then we should be able to do the entire structure …”. In cross-examination, Mr Dupont said that the 3.5% to which he referred was the strike rate for the swaption (transaction 5), and he denied that he was describing the three transactions as a single “entire structure”: “I am seeing the swaption and the CMS swap as one structure because … I talk about a swaption being 3%. So I assume that 3.5% as a swaption – of this strike level of the swaption has an impact on the price. Hence the structure for me is the swaption and the CMS swap, not the three together … obviously we will be happy to do the swap as well, but the swap was always independent of the other two trades”.

To my mind this is not a natural understanding of the exchanges, and I cannot accept Mr Dupont’s evidence. Later in the conversation, Mr Dupont reverted to the change that was made to the terms:

“What we changed yesterday is simply that instead of those five years fixed, we will pay you 5% and we are changing it to 4.5 years, i.e. six months less, and we can use it to pay you 3/5/5 uh … swap that runs from 2000 … from October 2011 until 1 April 2056. That is how we have actually structured it.”

This statement does not exactly describe either a payment under the swap or a potential payment under the swaption: under the swap, Vestia, not Credit Suisse, were paying 3.5%, but payment under the swaption would not begin in 2011 but (assuming that it was exercised) in 2026. The first is an understandable slip, and to my mind the reference is clearly to the interest under the swap. I cannot accept that Mr Dupont might have had the swaption in mind when he referred to payments beginning in October 2011: that would contradict the very nature of the swaption.

The parties’ expert witnesses on derivatives, Mr Grove and Mr Dulude, clearly stated the reality of the matter in their joint memorandum:

“In entering into [transaction 3 and transaction 5] Vestia apparently traded (1) the risk, but by no means the certainty, that the market level of rates at the Exercise Date of [transaction 5] would result in the [transaction 5] swaption being excercised by [Credit Suisse], an unfavourable result for Vestia, for (2) the benefit of higher, and certain, fixed payment by [Credit Suisse] during the first four and a half years of [transaction 3].”

They also agreed that:

“Vestia would not have been able to enter into [transaction 4] with a fixed rate of 3.50% without having agreed to reduce the terms of the fixed 5% payment being made by [Credit Suisse] pursuant to [transaction 3] from five years, as originally contemplated, to 4 and a half years. Otherwise the fixed rate payable by Vestia pursuant to [transaction 4] would have been higher than 3.50%. ”

They explained that this was their understanding of the transcript of the conversation between Mr Dupont and Mr de Vries, and I suppose that it might not strictly have been for the expert witnesses to express a view about that. But in my judgment they were obviously right, and I am bound to regard as disingenuous Mr Dupont’s attempts otherwise to explain the exchange.

Later in the conversation Mr Dupont went through the basic terms of the three transactions. He first described the swap that became transaction 4. He continued, “And then we do a swaption”, and described what became transaction 5. He then said, “And then the last part is the first fifteen years …”, and went on to describe what became transaction 3. Mr de Vries asked Mr Dupont to send an email setting out his description, and then there was this exchange (according to the agreed translation):

“Dupont – Yes, but I will do it now. I will do it immediately. I will put it in an email.

De Vries – Simple and quick … Payer… because they are all independent little trade deals, right?

Dupont – They are all independent trade deals, there are three independent trades.

De Vries – Ok.

Dupont – Ok?

De Vries – Because I would run into problems with my hedge, otherwise.

Dupont – No-no-no-no, they are all loose trade deals. The trades don’t have anything to do with each other. They are all independent trades from each other. You have a 30-year … sorry, a trade of 45 years, fixed floating swap, you have a 15-year fixed floating swap for which we pay you a coupon and you pay us 6 months’ Euribor and you also sell us a swaption. A swaption that begins in 15 years’ time and that runs for 30 years. So these are three independent transactions.”

It was put to Mr Dupont in cross-examination that it was simply a “game”, and “far removed from reality”, to speak of the trades being “independent” and not having “anything to do with each other” because they clearly were connected. Mr Dupont insisted that they were independent because, by reference to transactions 3 and 5, Mr de Vries and Vestia could have done either trade by itself albeit on different terms. Mr Dupont said that it made “total sense” so to describe the trades “Because … the trade logic for entering into the three different trades, clearly from Vestia’s point of view, were separate, and also from our point of view”.

At 16.07 on 16 March 2011 Mr Dupont sent Vestia an email under the subject line “Term sheets”:

“As discussed on the phone, here are the terms and conditions of the three transactions we concluded with Vestia today. The final terms sheets will be sent by my colleagues at the legal department.

Thanks very much again for today’s transactions. …”.

The attachment was in fact a single document of “Final Indicative Terms and Conditions”, and set out the terms of the three transactions. It was then set out under the heading “Other” provisions that the “calculation agent” was Credit Suisse and that there was a credit break after ten years and every five years thereafter. There were also sensitivity analyses of interest rate risks and volatility risks that were stated to be “for the whole structure i.e. CMS transaction, Fixed-Rate Swap and Swaption combined”; and tables setting out the coupons in different circumstances firstly for the CMS transaction alone and secondly for all three transactions.

In a further telephone conversation with Mr de Vries that afternoon, Mr Dupont referred to the dealing as a single transaction: “it is a good transaction” (“Maar het is een goede transactie”); and “it is simply a smart transaction” (“het is gewoon een versandige transactie”).

Credit Suisse first sent out a Confirmation (by way of a letter agreement similar to that for transactions 1 and 2) for the three transactions dated 9 May 2011 and it was countersigned by Mr Staal and returned by Vestia on 15 June 2011. It had five numbered paragraphs:

The first version of the Confirmation contained errors (about what was presented as an overall termination date, about the starting date and end date for payments under transaction 3 and about the definition of settlement days), and Credit Suisse sent out on 15 July 2011 a revised Confirmation, which Mr Staal countersigned and Vestia returned to Credit Suisse on 1 August 2011.

Towards the end of March or on 1 April 2011 Mr Dupont attended a conference organised by the WSW, and on 1 April 2011 he sent himself an email by way of a memorandum for himself of discussions that he had, including with a Ms Irene Munoz of the WSW. He wrote: “Tried to explain the benefits of selling 0 pc [per cent] infl[ation] floors. Started out with selling ordinary swaptions. Difficult story”. It was suggested to Mr Dupont in cross-examination that his note reflects that he was having difficulty in persuading Ms Munoz of the benefits of SHAs selling swaptions, but he denied this. He said that his note reflected that he had had difficulty in explaining the benefits of selling instruments with 0 per cent inflation floors, and had sought to do so by comparing them with swaptions. This is consistent with the informal record that he made and inherently plausible, and I accept his explanation.

On 8 April 2011 Mr de Vries sent Mr Dupont an email asking for a quotation for a fixed/floating rate swap for a notional amount of €50 million starting on 1 February 2012. Credit Suisse provided one, but it was not accepted: Mr Dupont understood that Vestia received a more competitive offer. However, during the exchanges about this, Mr de Vries asked for another quotation for a similar payer swap with a start date of 1 May 2012. Credit Suisse’s quotation for this was accepted (as transaction 6), and Credit Suisse sent Vestia Final Indicative Terms and Conditions on 8 April 2011 and also sent a Confirmation the same day. Mr Staal countersigned the Confirmation, and it was returned to Credit Suisse on 19 April 2011.

On 12 May 2011 Mr Dupont sent Mr de Vries a proposal for a CMS linked swap, whereby Vestia would pay Credit Suisse amounts based on a CMS formula and Credit Suisse would pay Vestia according to the rate for 6 months’ Euribor. In response Mr de Vries asked that Credit Suisse convert the idea into a receiver swap to start from 1 June 2011, effectively similar to transaction 3, coupled with Vestia selling Credit Suisse a payer swaption. Mr Dupont’s evidence was that Mr de Vries told him that he was “pleased with” transaction 3 and interested in another transaction whereby Vestia might take advantage of the pattern of the “forward curve”; and Mr de Vries had informed him – he did not recall when - that Vestia had in their portfolio a swap arrangement with a third party which was due to start in 15 years’ time and to run for 30 years, and that they were to pay 2% in return for a floating rate coupon. I accept that evidence: it is corroborated by an email that Mr Dupont sent to Mr Curran on 15 June 2011 (see paragraph 122below).

On 17 May 2011 Mr Dupont sent Vestia a revised proposal, and in his covering email he said that it was “no problem for [Credit Suisse] to tweak this some more”. The revised presentation said that the proposed structure could be adjusted “so that it fits Vestia’s hedging portfolio perfectly”. It was explained that the proposal “allow[ed] Vestia to make gains if the short-dated interest base rates are to rise in the future”. This exchange was the origin of transactions 7 and 8. On 23 May 2011 Mr Dupont and Mr de Vries spoke by telephone about the proposals, but because the market had recently dipped it was decided to defer considering them until it recovered.

At a meeting in London on 31 May 2011 Mr Dupont presented to Mr de Vries what he described as “Interest Rate Linked and Algo Linked Hedging Ideas”. This proposal developed into transaction 9. The presentation referred to market conditions (that 6 months’ Euribor was “close to its all-time low”, but there were pointers to rising short-term rates), and said, “A range accrual swap strategy is an efficient way to take advantage of these market conditions while taking a view that short-term rates will indeed rise, but not to historically high levels”. Mr Dupont agreed in cross-examination that he was suggesting that, if Vestia considered that short-term rates would rise but not to historically high levels, they could make some money from what was proposed. He described Vestia’s rationale for the transaction as being that, whilst the 6 months’ Euribor rate was close to an all-time low, forward rates anticipated a rapid rise, and the proposal would result in payments for Vestia in the event that the rates remained lower than anticipated in the forward market. He rejected the description of the proposal as a “bet” against what the markets were predicting, but he accepted that it would involve Vestia taking “an informed view” as to how the markets would move.

After the meeting, Credit Suisse tailored their proposals for a CMS-linked derivative and a range accrual swap in light of the discussions, and on 9 June 2011 Mr Dupont sent Mr de Vries a presentation of the adapted proposals. They then spoke by telephone. According to the agreed transcript and translation of the conversation Mr de Vries told Mr Dupont that he had had a long meeting with the CFV, and said “I was going to be sacked but I think I told you something about that already”. Mr Dupont told me that he thought the tape of the conversation poor, and that he could not understand what Mr de Vries was talking about. He said that he might not have heard Mr de Vries correctly during the telephone conversation, but was sure that he had not heard Mr de Vries say that he was going to be sacked. He also said that he knew nothing about Mr de Vries having problems with the CFV. I do not accept that: even if Mr Dupont missed what Mr de Vries said on this occasion, Mr de Vries was apparently repeating something that he had said before. I so find: Mr Dupont is too unreliable a witness to persuade me to reject this obvious inference on the basis of his denial.

Later the telephone conversation turned to Credit Suisse’s proposal for a range accrual transaction. Mr Dupont said that he had sent the proposal again, but Mr de Vries said that, while it had a “call moment in it” (that is, it included an option for Credit Suisse to terminate it), it involved risk and that he was “not that fond of range accruals” because they were “troublesome”. Mr Dupont explained the attractions for Vestia that he saw in the proposals: that they would be paid 4.85% provided that the Euribor rate did not go above the “barrier”, which he thought “unlikely”. Mr de Vries agreed to Credit Suisse giving him a quotation on the basis that there was an option to terminate after five years (rather than three years) and with other adjustments.

On 14 June 2011 Mr de Vries had approached Mr Dupont to have the terms of transaction 6 changed. Since it had been concluded, interest rates had fallen, and he wanted to sell Credit Suisse an option to cancel the transaction after nine years and to use the premium from the option to reduce the coupon paid by Vestia over the nine years.

Another change in Mr de Vries’ thinking is reflected in an email which Mr Dupont sent to Credit Suisse’s Credit Department on 14 June 2011. He reported that Mr de Vries “likes the idea” of the CMS arrangement but “with rates rallying he wants to switch Vestia selling us a Receiver Swaption ([Credit Suisse] receives) to Vestia selling us a Payer Swaption ([Credit Suisse] pays)”.

Mr de Vries had told Mr Dupont that Vestia had a payer swap arranged with a third party that was to start in 15 years time (that is to say, in 2026) and was to run for 30 years (until 2056) and under which Vestia were to pay fixed rate interest of 2% in return for interest at a floating rate. Although Mr Dupont did not recall when they had this conversation, I accept that Mr de Vries told Mr Dupont this: as I shall explain, this information was included in a proposal that Mr Dupont sent to Mr Curran. I also accept that Vestia had such a swap: there was no reason for Mr de Vries to tell Mr Dupont this if it was untrue. On 15 June 2011 Mr Dupont sent Mr Curran an email submitting the proposed transactions for approval as “non-standard”. He said that “The 3 transactions consists [sic] of a hedge for the client. Additionally, the client does not have an open exposure as, where required, the transactions are capped and floored conservatively”. He referred to three transactions because he presented the proposed swaption (transaction 8) and the CMS arrangement (transaction 7) as a single transaction, and the swap (transaction 9) and the re-structured transaction 6 as separate transactions. If Credit Suisse exercised the swaption, the floating leg would match and cancel out the floating leg of the arrangement with the third party, and the net effect of the fixed rate legs of the two arrangements would be that Vestia would receive for the duration of the swaps a net return of 1.55% for the terms of the swaps, that is to say the difference between the 2% that they were to pay to the third party and the 3.55% that they were to be paid by Credit Suisse. Accordingly, in his email Mr Dupont wrote of the CMS arrangements and swaption, “The client already has an outstanding forward starting 15Y30Y payer swap with another bank at 2.00%. So this potential swap would overlay an existing swap”. He explained that the premium on the swaption was being used to “optimise” the CMS arrangement. Thus, these explanations echoed the explanation about transactions 3 and 5 given in Mr Dupont’s email dated 15 March 2012 seeking Mr Curran’s approval under the procedure for non-standard transactions: see paragraph 100above.

Mr Curran gave his approval for the proposed transactions, requiring similar control procedures as for transactions 3, 4 and 5. In his witness statement Mr Curran said that he knew that Vestia had entered into callable range accrual swaps before, and, as with transaction 3, he was “comfortable” with the CMS structure in view of the floor and the ceiling. He also said with regard to the CMS arrangement that clients frequently seek to “monetise” their expectations about how the market will move and here Vestia apparently thought that in this way they could reduce their long-term funding costs. However, he also said when cross-examined about this that the arrangement would be “irrational” unless it was off-setting some risk already in the portfolio.

On 16 June 2011 between 10.21 and 10.35 Mr Dupont and Mr de Vries spoke on the telephone both about the proposed changes to transaction 6 and about what became transactions 7, 8 and 9. In their conversation, Mr de Vries spoke of doing the transactions separately: “I’m thinking: one at a time. The next day, another one, and the following day, another”. Mr Dupont’s response was “Yes, but you should be able to do all three, because one of them is particularly advantageous for you”. He explained in his evidence that he was referring to the proposed CMS-linked arrangement (which became transaction 7) with regard to which, he said, the market had moved against Credit Suisse. He told Mr de Vries, “We have left the conditions as they were, although we actually should have adjusted them, but we have left them. If we can do all three of them together, we can retain those conditions”. Although Mr Dupont referred to three transactions, according to evidence in cross-examination he had in mind the restructured transaction 6, transaction 7, transaction 8 and transaction 9, and he referred to three (not four) transactions because he was thinking (as he would have it, mistakenly) of “the CMS swap and the swaption” (sc. transaction 7 and transaction 8) as a single transaction.

Mr Dupont also said to Mr de Vries that he knew that it was important to Vestia that they initially received a coupon of 5%, and that he had resisted pressure from his “colleagues” to reduce the amount or the period for which it was to be paid:

“I know that the 5% is important to you. My colleagues have been saying for ages ‘Ok, we need to reduce it…’ If possible, we need to reduce it to around 4.75, over 3½ years. I said ‘I want to leave it at 5% for four years’ because I know that it is important to you, but we would do it on condition that we do the three together. Because the three together are very good. Firstly, you have the … It is really good: 5% for four years and then, as I said, that CMS structure is for you, is good for your. … ”

In cross-examination Mr Dupont said that he could not remember whether Credit Suisse considered that “from an economic point of view” transaction 7 could not be made in isolation. He said that, when he was speaking to Mr de Vries, his “motivation could have been that [he] just wanted to close the trades and not an economic necessity for the bank to close the trades as a package”. Whatever might have been Mr Dupont’s purpose, he told Mr de Vries that the trades had to be concluded together.

As with previous transactions, Credit Suisse’s Credit Department were to assess the “PV” (present value) of the transactions. Separate calculations were requested for three trades (again looking upon transactions 7 and 8 as a single “trade”), as well as for them all together. Late on 15 June 2011 they calculated that these values, the value of the “total package” being $7.39 million. The next day Mr Dupont told Mr Wachsmann that, net of CVA, the value to Credit Suisse was nearly $5 million.

On 16 June 2011 at 12.58 Mr Dupont sent Mr de Vries an email in which he said that Credit Suisse had “priced everything up again”, and that “we would like to offer you these attractive conditions if we do the three together”. He explained in cross-examination, and I accept, that, although he referred to three transactions, he had in mind that Credit Suisse and Vestia should enter into what became the restructured transaction 6 and transactions 7, 8 and 9. Mr Dupont’s explanation was again that, as in the telephone conversations, he mistakenly conflated the CMS (transaction 7) and the swaption (transaction 8) and so referred to three (not four) transactions. After further discussions over the telephone later that day, agreement was reached on the terms of transactions 7, 8 and 9 and of the re-structured transaction 6.

Later that day, Credit Suisse sent Vestia three separate Final Indicative Terms and Conditions documents for (i) transactions 7 and 8, (ii) for transaction 9 and (iii) for the re-structured transaction 6. (There were errors in those for transactions 7 and 8 and for transaction 9, and corrected versions were also sent.) The Final Indicative Terms and Conditions for transactions 7 and 8 included a “Risk Analysis” which set out interest rate risk sensitivities by reference to the combined effect of the two transactions.

As for Confirmations for these transactions:

All the Confirmations were materially similar in format to that for transactions 3, 4 and 5: see paragraph 111above. The Confirmation of 11 August 2011 set out the terms of transaction 7 in paragraph 2 and the terms of transaction 8 in paragraph 3, and then had early termination provisions in paragraph 4, whereby each party had options to terminate at mid-market on 16 June 2021 and on each fifth anniversary thereafter, and account details were in paragraph 5. As with transactions 3, 4 and 5 there is an issue whether the early termination provisions could be exercised in respect of only one of the transactions or whether it had to be exercised in respect of both, if at all.

On 9 September 2011 Credit Suisse and Vestia entered into transaction 10. Mr Dupont had discussed the proposal by telephone, and later that day Mr de Vries left an instruction that if, during the day, Credit Suisse could meet Vestia’s target price of paying 3.1% on the fixed leg, they should conclude the deal. The market price fell to just below 3.1% and so Credit Suisse executed it, and Mr Dupont sent Vestia Final Indicative Terms and Conditions by email. A Confirmation was sent to Vestia that day, it was signed by Mr Staal and returned to Credit Suisse on 24 October 2011.

On 12 September 2011 Credit Suisse and Vestia agreed upon transaction 11. Mr de Vries had expressed an interest in a long-dated 50 years’ swap, but later expressed a preference for a 15 years’ swap that he referred to as “safer” (“veiliger”). The transaction was agreed by him and Mr Dupont by telephone, a Confirmation was sent out that day, and another Confirmation with a slight amendment was sent on 13 September 2012. That version was countersigned by Mr Staal and returned on 20 September 2011. That was the last transaction entered into by Credit Suisse and Vestia.

By September 2011 long-term interest rates had started to fall significantly, and this created mark-to-market exposure on a portfolio such as Vestia’s which (overall and in net terms) used long-dated arrangements under which fixed interest rates were paid and floating rates received. As I have said, when Mr Dupont and Mr de Vries spoke on the telephone on 12 September 2011 Mr de Vries said that he was to have a meeting with the WSW: I have explained at paragraph 66above why I cannot accept Mr Dupont’s evidence about this conversation.

On 28 September 2011 the WSW wrote to Vestia referring to requests that Vestia had made in August and September 2011 for facilities, and support that the WSW had agreed to provide. They stipulated conditions for their support, including that there be a risk analysis as to whether Vestia would have to invoke a guarantee of liquidity risks again. On 8 November 2011, in a telephone conversation with Mr Dupont, Mr de Vries referred to the investigation and said that he would “need to scale it [his activities] down substantially”. He said that Cardano were going through the “entire portfolio” and valuing “everything”. Mr Dupont commented that there were “at least two” transactions with Credit Suisse that they would be unable to value. He explained in evidence that he was referring to transactions 3 and 7, and that, because he had not heard of Cardano, he had assumed that they were a small company and would be unable to value complex transactions. Again, I cannot accept Mr Dupont’s evidence: in a witness statement he had described Cardano as a “highly regarded derivatives specialist”, and there was no suggestion there that he had not heard of them in late 2011. In any case this does not sensibly explain what he said to Mr de Vries. His comment that the CMS swaps could not be valued in my judgment reflects Mr Dupont’s view about how complex the transactions were, and not his views of Cardano’s capability.

Vestia’s financial position deteriorated, and they increasingly faced calls for collateral from their banks. In about December 2011 they appointed Cardano to draw up a recovery plan. Mr de Vries approached Mr Dupont to seek to restructure Vestia’s portfolio with Credit Suisse: discussions continued for some time, but it suffices to say that they bore no results. Cardano were appointed as Vestia’s collateral managers in the first quarter of 2012. On 1 February 2012 Mr Staal resigned from Vestia and a new Board of Directors was appointed. The Interim Chairman was Mr Erents, who had been the Chairman of the WSW between 1999 and 2003, and had held directorships and served on supervisory boards of various SHAs. His appointment was always intended to be temporary, and he ceased to be a director of Vestia on 1 July 2013, although he remains an advisor.

Mr Erents said that, when he joined Vestia, they were facing a financial crisis, mainly because of their enormous derivatives portfolio with twelve counterparty banks, and because the fall in interest rates had left them with an enormous mark-to-market exposure. The core of the problem can be seen in more detail from the draft report by Cardono of November 2011. It included a table setting out an overview of the market value of the derivatives portfolio as at 26 October 2011. Overall the mark-to-market value was minus €1.473 billion. This was attributable to a notional €9 billion of payer swaps, which had a negative value of €653 million, and receiver swaptions which had a negative value of €1.196 billion.

In February 2012 Mr Greitemann, who had qualified as a Certified Treasurer in 1991, joined Vestia to work with Mr de Vries, initially on a part-time basis. By a letter to Credit Suisse dated 9 February 2012 Vestia confirmed that Mr de Vries was authorised to act for them in relation inter alia to derivatives, but on 12 April 2012 Mr Dupont received a letter from Vestia dated 11 April 2012 that revoked Mr de Vries’ authority to act for them “due to organisational changes”. On 13 April 2012 Mr de Vries was arrested on suspicion of receiving bribes in relation to finders. On 17 April 2012 KPMG formally notified Vestia that they could not stand by their audit approval of Vestia’s accounts for 2010.

On 7 March 2012 Cardano sent Vestia a report on the structured instruments that they held. They said that “In addition to a large number of standard products, Vestia’s portfolio contains a number of structured transactions which are less standard in view of its product characteristics and which are hardly traded”, including index linked swaps and “CMS spread swaps”. They said that these structured products were not of a character that effectively converted a floating rate loan to a fixed interest loan, and that they could not be valued accurately because of their complexity. They said of the CMS instruments that “The risk profile and pay-off profile of this type of transaction can … not be linked to the profile of the variable portfolio”.

On 1 May 2012 Mr Curran and Mr Tom Hopkinson of Credit Suisse’s Europe and Middle East and Africa Anti-Corruption compliance team had met Mr Erents and Mr Greitemann, who had by then become Vestia’s Treasurer: the details of their discussions are not relevant for present purposes, and I observe only that it was not then suggested that Vestia did not have capacity to enter into any of their transactions with Credit Suisse or that any of them were made without their authority. At a meeting on 21 May 2012 with their bankers (including Credit Suisse) Vestia, through Mr Erents, stated that they would be temporarily suspending collateral payments. I do not need to explain the further meetings and exchanges that Credit Suisse had with Vestia and other banks in the second half of May 2012.

On 29 May 2012 Vestia summarily dismissed Mr de Vries on the ground that he had accepted money from “finders” who introduced banks to him: as I have said, there is no suggestion that Credit Suisse were introduced to Vestia through a finder or that any improper payments were made in relation to their business with Vestia. Also on 29 May 2012 Vestia entered into “standstill agreements” with the other banks with whom they held derivatives, but reached no agreement with Credit Suisse. On 6 June 2012 Credit Suisse called for Vestia to provide collateral under the CSA, and on 12 June 2012 they served a Notice of Default because Vestia did not do so. In a telephone conversation with Mr Curran on 12 June 2012, Vestia said that they believed that they need not post collateral because the mark-to-market had fallen below the “threshold”, but Credit Suisse considered that Vestia were still liable to provide collateral and remained in default. They therefore proceeded to send their Early Termination Notice.

Vestia have brought proceedings against both Deloitte and KPMG in respect of their audits and investigations of Vestia’s use of derivatives. They have also brought or are also contemplating bringing proceedings against former employees and others.

I first consider the issues about whether each transaction was a separate contract between the parties. This is because in English law a single contract cannot be in part ultra vires: a contract is either within a party’s capacity or it is not. Neither Credit Suisse nor Vestia argued otherwise. In Credit Suisse v Allerdale, [1997] QB 306, 334-335 Neill LJ said:

“It was argued on behalf of the bank that if the scheme was permissible in part the guarantee was enforceable pro tanto. As I am of the opinion that the scheme was beyond the capacity of the council and was adopted for improper reasons this argument is in one sense academic. Nevertheless I think it is right to explain why I consider that this argument too must be rejected … the provision of the time-share units was an integral part of the scheme. Indeed the scheme would not and could not have gone ahead without the time-share development. In these circumstances it seems to me that the contract without the time-share development would have been a quite different contract.”

As I have said, Credit Suisse contend that they entered into the nine disputed transactions with Vestia in nine distinct contracts; that Vestia had capacity to make each of them; but that, if any of the disputed transactions was outside Vestia’s capacity and was void, this does not affect the validity of any other transaction. They say that this is the effect of the agreements that were made orally in the telephone exchanges between Mr Dupont and Mr de Vries, and that the subsequent documentation of them (by way of the Final Indicative Terms and Conditions and the Confirmations) does not affect the position. They have a secondary case that, even if transactions 3 and 5 were made in a single contract, that contract did not include transaction 4.

Vestia agree that their contracts with Credit Suisse under the Master Agreement were concluded orally in the telephone conversations. They submitted, however, that the transactions were grouped as I have explained in paragraph 16 above, and so the disputed transactions fall into five groups (transactions 1 and 2; transaction 3, 4 and 5; transaction 6; transactions 7 and 8; and transaction 9). They argued that:

The conditional contracts argument was developed by Vestia only in their final submissions, and Credit Suisse contended that it is not open to Vestia to rely on it because it was raised too late. Before considering the three arguments of substance, I shall explain why I reject this procedural objection. I must set out something of the history and start with Credit Suisse’s pleading in their Particulars of Claim after they were re-amended by permission that I gave towards the start of the trial. Credit Suisse pleaded that Vestia entered into “a number of interest rate swaps and swaptions with [Credit Suisse], each of which constituted a Transaction governed by the Master Agreement”, and that “Each of the Transactions was confirmed in a document (a “confirmation”) which supplemented, formed part of and was subject to the Master Agreement”. Thus, the natural understanding of the pleaded case was the written Confirmations came under the aegis of the Master Agreement and were contractual, but the pleading simply did not deal with how many separate contracts there were, as opposed to how many “Transactions” there were, the term “Transaction” being used in the pleading in the technical sense of the expression used in the Master Agreement. This interpretation was consistent with the Reply before it was amended during the trial: it pleaded that Mr Staal had actual authority to enter into the Transactions and Mr de Vries had actual authority to negotiate them: the implication was that the Transactions, having been negotiated over the telephone, were concluded by way of the written Confirmations. However, the Reply was amended (formally on the fifth day of the trial, 31 March 2014) so as to plead that Mr de Vries had actual authority to enter into the Transactions. The implication of the amendment was, it can now be seen, that Credit Suisse contended that Mr de Vries had entered into contracts orally. Thus, it was really only during the trial that there was introduced into the pleadings, and then somewhat obliquely, an issue about whether each of the transactions was agreed in a discrete oral contract; and it was only during oral openings, on the second day of the trial and in reply to my question, that it became clear that this was an issue between the parties. Nevertheless, Mr Davies did not suggest that it was not open to Credit Suisse to advance a case that each of the Transactions was agreed (so as to become part of the Master Agreement) through a separate contract concluded orally. He was right not to do so: Mr Dupont and Mr de Vries certainly evinced an intention to enter into contracts in their telephone conversations.

In these circumstances I observed during Mr Howe’s closing submissions, when it became clear that Credit Suisse’s case was that the contracts for the transactions were concluded orally on the telephone, that Vestia did not appear to be contending that transactions might be inter-dependent one upon another, so that one transaction took effect only if another related contract was (or others related contracts were) binding upon the parties. During Mr Davies’ closing submissions, I sought to clarify Vestia’s position with him, couching my question as being whether one contract might be subject to an implied term that another contract was, or other contracts were, made. Mr Davies acknowledged that no such case had been advanced on Vestia’s behalf, but indicated that Vestia would wish to run such an argument. I requested that, if they did, he should produce a written formulation of it, and he did so. It was in these terms:

“If there were separate contracts in the groups comprised by [transactions 1/2, transactions 3/4/5 and transactions 7/8], then on the true construction of the oral exchanges, the written indicative terms and the confirmations, the intention of the parties was that each contract should be conditional upon making the others in its group”

For convenience, I refer to this as the “new argument”.

Credit Suisse made it clear that they resisted Vestia introducing the new argument. I arranged a short hearing on 2 May 2014 to hear submissions about whether Vestia should be permitted to advance it because the (tight) trial timetable did not allow Mr Howe time to reply to Mr Davies’ submissions on this point before the Easter vacation. Shortly before the hearing on 2 May 2014 Credit Suisse served a witness statement of Mr Tamlyn Ludford, a Director in the General Counsel Division of Credit Suisse with responsibility for the conduct of these proceedings.

Mr Howe’s first objection was that Vestia’s defence does not plead the new argument, and I agree that it does not. I also agree that it should have been pleaded, although there was no suggestion that, once it had been formulated in writing during closing submissions, there would be any point at that stage of the trial to have required a formal amendment. However the question whether the new argument should be entertained is, in my judgment, to be decided by similar principles to those that would apply as to whether a formal amendment should have been permitted. Credit Suisse therefore cited authorities about late amendments: Swain-Mason v Mills & Reeve, [2011] EWCA Civ 14, Brown v Innovatorone Plc, [2011] EWHC 3221 (Comm) and Hayer v Hayer, [2012] EWCA 257. Mr Howe referred to the considerations that Hamblen J identified in the Brown case:

In the two Court of Appeal cases an application to amend was made after, and clearly as a result of, judicial intervention. In Hayer v Hayer, in which an appeal against a decision to grant permission to amend succeeded, Arden LJ said this (at paragraph 38):

“In this case the judge, having given what he no doubt thought was a helpful indication, was then faced with having to decide an application as the impartial judge effectively to follow up on his indication by amending the pleadings to introduce the point he had suggested. When such a thing happens the judge must bear in mind the point he thought of was not necessarily a good point especially if it has not occurred to the parties themselves, but he has to be satisfied that it is in the interests of both parties to accede to the amendment and that it is proper in the exercise of his discretion to permit the amendment.”

Mr Howe cited this passage, but I am not sure what Arden LJ meant when she said that the judge must be satisfied that “it is in the interests of both parties to accede to the amendment”. I am not satisfied that it is in the interests of Credit Suisse to allow Vestia to argue the conditional contracts argument: that is why they resist it. Although occasionally litigants might be higher-minded, typically parties seek or resist amendments because they perceive it to be in their interests to do so, and generally judges proceed on the basis that the parties can better assess what is in their interests than the court. I think that Arden LJ must have meant that the judge must be satisfied that it is in the interests of doing justice between the parties to accede to the amendment, and went on to add (because, as the Court of Appeal had emphasised in Mitchell v News Group Newspapers Ltd, [2013] EWCA Civ 1537, justice under the overriding objective of the Civil Procedure Rules does not equate with justice between the parties) that the judge must also be satisfied that it is proper to permit the amendment.

However that may be, I recognise the danger in an adversarial system of the judge introducing into the trial new arguments that have not been advanced by the parties and which the parties have not come to trial prepared to meet. In this case, however, because the issue about how many discrete contracts had been made was not crystallised on the pleadings (largely, in my judgment, because Credit Suisse had not pleaded their case in terms of what contracts were made), I thought it essential to clarify what exactly the parties understood to be the issues between them.

Further, when first I observed that it had been argued that there might be separate but inter-dependent contracts, Mr Howe’s position was that the evidence would have been exactly the same if it had been and there would be no prejudice of this kind to Credit Suisse if it were advanced. This response was given when I formulated an argument by reference to a possible implied term. Mr Davies does not seek to advance that formulation, but rather an argument based on the proper interpretation or construction of the contractual exchanges. Mr Howe made much of the distinction, citing in particular Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc (The “Reborn”), [2009] EWCA Civ 531, in which the Court of Appeal emphasised that the test of whether a term is to be implied is one of necessity, and on this basis submitted that “the implication of a contractual term is a different and altogether more ambitious undertaking than that of contractual interpretation of express terms”. I consider that this point was much over-stated: in South Australia Asset Management Corp v York Montague, [1997] AC 191, 212 Lord Hoffmann observed that, “As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting”, and in The “Reborn” itself Lord Clarke MR said (loc cit at paragraph 9) that “the implication of a term is an exercise of construction of the contract as a whole”. See too Chitty on Contracts (31^st Ed, 2012) Vol 1 para 13-002. In any case, it was not suggested that, had I initially couched the new argument in the terms of Mr Davies’ formulation, it would have altered Mr Howe’s initial response to it.

However, that response no longer represents Credit Suisse’s position: it is now contended, with the support of Mr Ludford’s evidence, that if the conditional contracts argument had been advanced earlier Credit Suisse (i) would probably have adduced more expert evidence, including evidence from additional witnesses, “as regards the market practice in 2010-2011 of banks comparable in standing to [Credit Suisse] and SHAs with ‘professional client’ classification under [The Markets in Financial Instruments Directive, 2004/39/EC, as amended]”; (ii) would have adduced further factual evidence in support of such expert evidence; and (iii) would have made and required of Vestia further disclosure correspondingly. The areas of additional expert evidence that Mr Ludford identified (on what he called a “non-exhaustive basis”) were (in summary) these:

All these matters, it was submitted, would have been part of the factual matrix of the contracts and so inform their construction and their implied terms. I cannot accept that: evidence of the contractual context is admissible only as to matters that were or are taken to have been known to both parties at the time that the contract was made. I cannot accept that Vestia might have known or are to be taken to have known about how Credit Suisse might have assessed risk or gone about hedging their exposures or dealt with credit limits or dealt with accounting or taxation matters. Nor can I imagine how evidence about possible changes in legal documentation or about any accounting or tax implications for Vestia might assist. Although the timing of the hearing about this part of the case was over two weeks after Mr Davies sought to advance the new argument, Credit Suisse gave no real indication about what helpful evidence might be adduced. Mr Howe protested that Credit Suisse had had little time for investigation, but I would have expected that they would have been in a position to identify anything that was actually known to them when they were entering into the contracts or was sufficiently well-known to be attributed to both parties so as to be admissible to inform the parties’ evinced contractual intention. In my judgment, Mr Howe’s first response was correct: if Vestia are permitted to advance the new argument, Credit Suisse will not suffer prejudice as a result of it not being raised earlier.

Mr Howe also submitted that the formulation advanced by Mr Davies does not state sufficiently clearly the case that they seek to advance. It was in this context that he emphasised, and in my judgment exaggerated, the distinction between the implication of terms and contractual interpretation. I do not consider that for this or any other reason the new argument is unclear or insufficiently defined. Mr Howe also said that the formulation that “each contract was conditional upon the making of the others” does not clearly state the consequences of a contract being invalid. I cannot accept that there is any real doubt about what is meant. I acknowledge that in the Swain-Mason case (loc cit at paragraph 73) Lloyd LJ said that in cases of very late applications to amend, the proposed text must “satisfy to the full the requirements of proper pleading”, but that is so that the other party can know the case that he has to meet. It does not invite wilful misunderstanding or a search for contrived ambiguities.

I therefore conclude that Vestia should be allowed to advance the new argument provided that it is sufficiently arguable to warrant consideration. In my judgment it is, and my reasons appear from the consideration of it below.

I add this, although my decision to grant permission to amend does not depend on it. The submissions were made by both parties in terms of what English law would regard as a particular contract. However, I observe that in the Credit Suisse v Allerdale case (cit sup at paragraph 142) Neill LJ spoke in terms of whether the “schemes” in that case was ultra vires. In Smith v Knox, [1988] 1 WLR 114, 163 and Vision Express (UK) Ltd v Wilson, [1995] 2 BCLC 419, 428 Knox J considered comparable issues in terms of whether “transactions” were ultra vires the legal entities. Moreover, there is no evidence about whether Dutch law would decide whether a legal entity has capacity to enter an individual contract or whether it would look more broadly at whether it had capacity to enter a scheme. I shall decide what obligations were binding on Vestia by reference to the issue presented in the parties’ submissions, that is whether individual contracts were within or outside Vestia’s capacity, but I should be more concerned to engage with whether this is the correct question if I could not properly have entertained the new argument.

Section 9(e)(ii) of the Master Agreement provided as follows:

“The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation will be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes, by an exchange of electronic messages on an electronic message system or by an exchange of e-mails, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex, electronic message or e-mail constitutes a Confirmation.”

Mr Dulude confirmed in cross-examination that as a matter of market practice parties are considered to be bound by an agreement reached orally over the telephone or otherwise and before their agreement is recorded in a Confirmation. This, in my judgment, was the nature of the dealings between Mr Dupont and Mr de Vries. I observe that this does not exactly mean their agreements were all concluded in direct oral conversations between them. The first two transactions were concluded, as I see it, when Mr Dupont left his voicemail message for Mr de Vries after he confirmed that the traders at Credit Suisse had accepted the terms that had been reached between them.

In most commercial disputes it is not relevant to analyse whether two parties have done their business by a single contract or by more than one. However, the question has come before the courts in cases concerning section 2(i) of the Law of Property (Miscellaneous Provisions) Act, 1989 (the “1989 Act”), which provides that “A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each”. Hence there have been disputes as to whether matters agreed by a vendor and purchaser of an interest in land were agreed as terms of the “contract for the sale … of an interest in land” (so that the land sale would not be effective unless the writing included those terms) or whether they constituted a separate contract and did not have to be included in the written contract of sale. Parties are free to arrange either pattern for their dealings, and it is a question of fact in each case which course they have chosen: see Grossman v Hooper, [2001] EWCA Civ 615, esp at paragraph 21, and North Eastern Properties Limited v Coleman, [2010] EWCA Civ 277.

Mr Howe submitted that the proper approach to determining in a particular case whether the parties have concluded a single contract or made more than one is to apply the principles articulated by Lord Hoffmann in ICS v West Bromwich Building Society, [1998] 1 WLR 896. Although it does not affect my conclusion, I should explain why I do not think that that is quite right. Those principles are concerned with contractual interpretation, and in Crest Nicholson (Londinium) Ltd v Akaria Investments Ltd, [2010] EWCA Civ 1331 Sir John Chadwick (in a judgment with which Maurice Kay and Longmore LJJ agreed) emphasised the distinction between questions of contractual formation and questions of contractual interpretation. He said (at paragraph 25):

“In my view the appellant is correct to draw a distinction between the court’s task when seeking to ascertain the parties’ intention under the terms of a contract which both accept has been made and the court’s task when seeking to determine whether or not a contract has been made at all. In the former case the question is “what did the parties intend by the words used in the agreement which they made”: in the latter, the questions are (i) “was there a proposal (or “offer”) made by one party which was capable of being accepted by the other” and, if so, (ii) “was that proposal accepted by the party to whom it was made”. In determining the first of those questions – was there a proposal made by one party (A) which was capable of being accepted by the other (B) – the correct approach is to ask whether a person in the position of B (having the knowledge of the relevant circumstances which B had), acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance.”

However, I accept the main thrust of Mr Howe’s argument about the principles by which I should decide whether each contract between Credit Suisse and Vestia comprised only one transaction. First, the question depends upon the intentions of those acting for the parties (or purporting to do so) at the time when the transactions were agreed. Thus the telephone exchanges argument depends on the intention of Mr Dupont and Mr de Vries at the trade date, and the documentation argument depends on the intention of those involved for Credit Suisse and Vestia when the subsequent documentation was exchanged. Further, although there is room for argument about whether the subjective or “in-house” intentions of parties are relevant to whether contracts have been concluded (see Chitty on Contracts (31^st Ed, 2012) para 2-004), as I see it in this case my decision cannot depend upon them. The question is how a reasonable man versed in the business would have understood the exchanges: see Pagnan SPA v Feed Producers Ltd, [1987] 2 Lloyds Reports 601 per Bingham J and Lloyd LJ. As I said in Maple Leaf Macro Volatility Masterfund v Rouvroy, [2009] EWHC 257 (Comm) at paragraph 228, in some circumstances the parties to what would objectively be held to be contractual are not legally bound by it, and it seems to me in principle that the same rules apply to the question whether the parties intended their arrangements to comprise one or more contracts. But circumstances in which subjective intentions might come into play are where the parties did not share the same intention, and one party knew or reasonably should have understood what the other intended (or, probably, if he had no view about it). It was not argued that this is such a case or that the subjective or in-house intentions of either party are relevant.

Mr Howe’s submissions about this part of the case concentrated particularly on transactions 3, 4 and 5, or more precisely on whether transaction 4 was a discrete contract (whether or not transactions 3 and 5 were parts of the same contract). Mr Davies’s submissions tended to concentrate on transactions 7 and 8. Both counsel, no doubt, had tactical reasons for directing attention to those transactions. However the logical starting point is with transactions 1 and 2: it is legitimate when considering later transactions to have regard to the pattern of the parties’ previous dealings, but the parties’ later dealings do not assist to interpret their previous contractual intentions.

In my judgment the intention evinced by Mr Dupont and Mr de Vries when they agreed upon transactions 1 and 2 was that they should together comprise a single contract. This is because they were agreed at the same time, because of what was said on the telephone and also, importantly, because of the nature of the arrangements. The agreement was that in return for agreeing to the swaption (transaction 2) Vestia should be paid a reduced rate of interest under the swap (transaction 1): this was the consideration for the swaption, without which it would not be contractual. Of course, in principle it is conceivable that the consideration for the swaption might be that Credit Suisse undertook to enter into, or did enter into, transaction 1, and so that the transactions were separate, albeit related, contracts, but it seems to me unrealistic to impute this pointlessly convoluted structure to the parties. They are more naturally to be taken to have intended to make a single contract.

There is another point: if Credit Suisse exercised the swaption, the floating rate interest legs would offset each other. Section 2(c) of the Master Agreement provides as follows:

“Netting of Payments. If on any date amounts would otherwise be payable –

(i)

in the same currency; and

(ii)

in respect of the same Transaction,

by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by which the larger aggregate amount would have been payable to pay to the other party, the excess of the larger aggregate amount over the smaller aggregate amount.”

These netting provisions apply only of the amounts would otherwise be payable “in respect of the same Transaction”. They would apply to the floating rate interest payable under the swap and the swaption if transactions 1 and 2 are parts of the same contract, but not otherwise. To my mind, it makes obvious commercial sense, and the parties are likely to have intended, that they should apply.

My conclusion that transactions 1 and 2 are parts of the same contract is certainly consistent with, and to my mind finds some support in, the telephone exchanges: the discussion about the terms of the swap and the swaption ending on the same date (see paragraph 85 above) and Mr Dupont’s message concluding the contract with its reference to “the trade” (not the trades: at paragraph 86). I therefore accept Vestia’s telephone exchanges argument with regard to transactions 1 and 2. Mr Dupont rightly referred to them as “a trade” in his witness statement: see paragraph 84above.

These are the essential reasons for my decision. I add that, if Credit Suisse exercised the swaption, the floating rate legs of transaction 1 and transaction 2 would cancel each other out, leaving Vestia to receive interest of the net difference of 2.5% of the notional amount. This underlines the close connection between transaction 1 and transaction 2.

Even if I had not accepted this argument I would have accepted Vestia’s documentation argument about these transactions. This is not because of the Final Indicative Terms and Conditions, although, as I have said, Mr de Vries sent an email agreeing to them. Certainly they included the provision about “Credit Break”, and I would interpret that as exercisable in respect of the swap and the swaption together but not separately: this seems to me the natural interpretation of the document as a whole and to make more commercial sense. As I shall explain, I consider that in the Confirmations for later transactions this consideration supports Vestia’s documentation argument. But I do not consider that, if the parties had entered into separate contracts for transactions 1 and 2, the Credit Break provision by itself would support an argument that by Credit Suisse communicating the Final Indicative Terms and Conditions and by Mr de Vries’ agreement to them, the parties evinced an intention to vary their arrangements and to treat the two transactions as parts of the same contract.

However, I accept the documentation argument because of the Confirmation. When they sent it, Credit Suisse told Vestia that it set out the terms and conditions of a transaction (not transactions), and they asked Vestia to countersign it to confirm their acceptance. There was no suggestion that Vestia were to consider the swap and the swaption separately and might accept the terms and conditions of one and not the other. To my mind, the natural interpretation of the Confirmation is that Credit Suisse were inviting Vestia to treat transactions 1 and 2 as a single contract and by countersigning and returning it Vestia were agreeing to do so. Mr Howe relied upon Mr Dulude’s evidence that there is no established practice in the market about when one Confirmation might be used for more than one contract, but, as I see it, that does not assist Credit Suisse. The documentation argument is based upon the wording of the documents and their natural meaning, and not upon market practice.

Mr Davies advanced another point: that each Confirmation sent by Credit Suisse had a single “outward” reference number, whereas individual transactions were given a separate “risk” number for Credit Suisse’s internal purposes. The suggestion was that, as far as their dealings with the counterparty were concerned, Credit Suisse looked upon the arrangements set out in each Confirmation as parts of the same contract. I do not find this convincing: it seems to me to put too much weight upon reference numbers which were, I infer, designed to assist administrative efficiency rather than indicate the legal structure that the parties had in mind.

If I had not accepted these arguments, I would have concluded that the parties clearly intended transactions 1 and 2 each to be conditional on the other being valid and binding. The authorities about section 2 of the 1989 Act contemplate that separate contracts that are parts of a single arrangement may be impliedly so related to each other: see the Grossman case (cit sup) at paragraph 21 and the North Eastern Property case (cit sup) at paragraph 54. I have already explained why the swaption depended on transaction 1 being valid: otherwise no consideration supported it. The parties to the swap clearly understood that Credit Suisse would not have agreed to its terms unless they were also concluding the swaption: otherwise it would have made no commercial sense for Credit Suisse. (At one point in his cross-examination Mr Dulude also said that compliance rules prevented Credit Suisse from trading “significantly off-market”. He was unable to explain what rules he had in mind, and I disregard that evidence.)

Vestia’s telephone exchanges argument in the case of transactions 3, 4 and 5 is more evenly balanced than for transaction 1 and 2. It is supported to some extent (at least for the contention that transaction 5 is not a discrete contract) by the fact that the parties had previously incorporated a swaption into an agreement for a swap.

The three transactions were, of course, agreed at the same time. On the face of it there is a significant correspondence between their terms, such that payments under them could be netted off if they are payable under the same contract: see paragraph 164above. This was possible because the semi-annual payments date under each transaction were the same, 1 April and 1 October. Thus:

Credit Suisse were able to point to aspects of the transactions which did not exactly match: for example, that the effective date of transaction 3 was 1 April 2011 whereas that for transaction 4 was 3 October 2011. And, of course, given that Vestia were arranging their derivatives on a portfolio basis, it would be wrong, as Mr Curran emphasised, to see corresponding terms as necessarily reflecting a purpose that payments under particular transactions should net each other off. But in broad terms, to my mind, the correspondence is indicative of an intention that the three transactions should fit together.

Moreover the rates for the individual transactions were not agreed in isolation. As with transaction 2, where the premium for the swaption was by way of improved terms (from Vestia’s point of view) for transaction 1, so here it is not disputed that, because of the swaption, the interest paid by Credit Suisse under the CMS until 1 October 2015 was increased.

Furthermore, if I have correctly understood what Mr Dupont said on 16 March 2011 (see paragraphs 105 and 106 above), the terms of transactions 3 and 4 were also inter-connected: the fixed rate of 3.5% under transaction 4 was agreed because the terms of the proposal for transaction 3 were adjusted. These considerations, in my judgment, indicate that the parties’ intention was that transaction 3, 4 and 5 should comprise a single contract. Against this, however, there is the strange exchange between Mr Dupont and Mr de Vries that I have set out at paragraph 108.

However I am not persuaded that because of this exchange Mr Dupont and Mr de Vries evinced the intention that they should enter into three separate contracts. The implication of this argument is that (subject to the convoluted argument that I have rejected when considering transactions 1 and 2: see paragraph 163 above) there was no consideration for the swaption and it was not binding on Vestia. The parties did not intend this.

I observe (although I recognise the danger of examining too precisely the exact wording of a conversation presented in translation) that Mr de Vries was concerned not that there should be separate contracts, but that there should be separate “trades”. On the face of it, he was not concerned about the legal structure of the arrangements but about how they might affect Vestia’s hedging arrangements. In so far as I can make sense of this exchange, Mr de Vries was concerned about how the arrangements were presented so that they would fit with how Vestia managed their hedging programme. It is not difficult to suppose that, if the terms of the three legs of the arrangements were not kept distinct, they could not be accommodated readily (or perhaps at all) by Vestia’s systems and Vestia would be caused difficulty in bringing them into account in the hedging portfolio. This is perhaps somewhat speculative, but it suffices to say that there is no compelling reason to think that this exchange was directed to the legal structure that the parties intended for their arrangements.

I therefore accept the telephone exchanges argument in relation to transactions 3, 4 and 5 and conclude in the exchanges Mr Dupont and Mr de Vries evinced an intention to make a single contract. I add only this: the exchange about “independent trades” seems to me to fit uneasily with Credit Suisse’s alternative contention that, even if transactions 3 and 5 comprised a single contract, there was discrete contract for transaction 4. Nothing in the exchanges suggests transaction 4 was being differently from the other two.

My reasoning about the Confirmation and the documentation argument about transactions 1 and 2 (at paragraph 168above) applies equally to transactions 3,4 and 5. However, here it is another argument, to which I have already alluded. The Confirmation included the early termination provisions, and to my mind it is more naturally interpreted as providing for the early termination of the arrangements set out in the previous paragraphs: I cannot accept that, without any words to indicate this, the provisions are to be interpreted as applicable to some, but not all, of the arrangements described in the document. After all, the alternative interpretation, for which Mr Howe argued, is that the early termination right might be exercised in respect of individual transactions. This would mean not only that the arrangements in paragraph 2 of the Confirmations could be terminated without affecting the arrangements in paragraph 3 (and vice versa) but that some of the arrangements in paragraph 2 of the Confirmation could be terminated without affecting other arrangements in the same paragraph. Mr Howe sought to rely upon expert evidence of Mr Dulude and Mr Grove to support his argument, but I did not find it convincing: indeed, it was not evidence, as I understood it, of an established market practice or understanding, and I am inclined to doubt whether it was admissible.

I do not think that Vestia can advance a separate argument about the Indicative Final Terms and Conditions (or intend to do so). The sensitivity analyses for the combined effect of the three transactions tend to indicate that they were being viewed as parts of a single contract, but Mr de Vries did not, as far as the evidence goes, respond to confirm that Vestia agreed to them. They are part of the background to the Confirmation, and perhaps lend some support to the contention that the Confirmation evinces an intention that three transactions should be treated as parts of the same contract, but I do not think that Vestia need to rely on this point and my conclusion about the documentation argument does not depend on it.

With regard to the conditional contract argument I consider that the reasons that would lead me to conclude that transactions 1 and 2 (if separate contracts) were conditional contracts apply to transactions 3 and 5. I would therefore have concluded, if I had rejected Vestia’s other arguments about these transactions, that each was each conditional on the other being valid and effective. The rationale does not apply as powerfully to transaction 4 although the commercial terms were, as I have concluded, inter-related. But I think it improbable that the parties intended only two of the three transactions to be mutually conditional. It is more probable that they intended each of the three to depend on the other two being valid and effective. I therefore accept the conditional contract argument in relation to transactions 3, 4 and 5.

I can deal with transactions 7 and 8 much more shortly. For the same reasons as I have explained in relation to transactions 1 and 2, I accept Vestia’s three arguments in relation to transactions 7 and 8. Indeed in my judgment they follow a fortiori in that:

I make clear that in reaching this conclusion I have not relied on the views of Mr Dulude about whether the transactions constituted individual contracts. He did not give evidence of any relevant market practice, and I am not persuaded that this part of his evidence was admissible: in any case, I did not find it useful.

I therefore accept Vestia’s contentions about what contracts were made: in my judgment the parties entered into the seven separate contracts set out at paragraph 16above.

The private international law principles governing issues of legal capacity, being outside the scope of the Rome Convention (Convention 80/934/EC), are governed by the common law. In view of the decision of the Court of Appeal in Haugesund Kommune v Depfa ACS Bank, [2010] EWCA 579, both parties accept that, for the purpose of determining the applicable law, the question whether Vestia acted within their objects or whether they transgressed their objects when making the disputed transactions is characterised as one of capacity. Both parties also accept that I should therefore decide this according to Dutch law, being the law of Vestia’s place of incorporation, but that, if Vestia did not have capacity to make any of the transactions, the legal consequences of this are determined according to the law governing the putative transactions: that is to say English law, because the Master Agreement provided that the Agreement, which meant the Master Agreement itself and all Confirmations, and any non-contractual obligations arising out of or in relation to it should be governed by and construed in according with the laws of England and Wales. I say that both parties accepted that I should decide the case on this basis at first instance because Mr Howe said that Credit Suisse might wish to challenge the decision in the Haugesund Kommune case in a higher court, and therefore asked that I make findings about the legal consequences under Dutch law if Vestia did not have capacity to make the transactions.

There was an issue between the parties about who bears the burden of proof with regard to whether Vestia had capacity to make the transactions: in this context (see paragraph 264below) both parties made their submissions about incidence of the burden of proof on the basis that it is to be determined by English law. In any case, there was no evidence that Dutch law is different from English law with regard to the burden of proof. I consider that under English law the burden is on Credit Suisse to prove that Vestia had capacity to make the transactions. To my mind, this follows from a simple application of the rule that the onus is on the party that asserts a positive case: “Ei qui affirmat non ei qui negat incumbit probatio”, per Visc Maugham in Joseph Constantine SS Ltd v Imperial Smelting Corp Ltd, [1942] AC 154, 174. This view is consistent, as Mr Davies pointed out, with the position where an agent’s authority is challenged: see Hely-Hutchinson v Brayhead Ltd, [1968] 1 QB 549, 593 per Lord Pearson. It is reflected in the old rules of pleading: a general traverse or plea of “non-assumpsit” was sufficient to put in issue a company’s capacity to contract: “If the contract given in evidence is void [as being ultra vires a corporation], the defendant did not promise in manner and form, and no special plea could be necessary”, The Copper Miners’ Company v Fox, (1851) 16 QB 229, 235. If (as Mr Howe submitted) Hamblen J in Standard Chartered Bank v Ceylon Petroleum Corp, [2011] EWHC 1785 (Comm)considered that the burden was upon the defendant to show lack of capacity, I disagree: apparently the point was not argued in that case.

Credit Suisse’s argument that the burden is on Vestia to prove that they did not have capacity to make the transactions was based on this passage of Chitty on Contracts (31^st Ed, 2012) vol 1 at paragraph 8-001:

“The incapacity of one or more of the contracting parties may defeat an otherwise valid contract. Prima facie, however, the law presumes that everyone has a capacity to contract; so that, where exemption from liability to fulfil an obligation is claimed by reason of want of capacity, this fact must be strictly established on the part of the person who claims the exemption.”

This is about the capacity of natural persons, and the position about whether a transaction or other act is within the objects of a legal person is different. At common law, if a corporation purports to make a contract that is outside its capacity, it is void ab initio, and cannot be ratified: York Corp v Henry Leetham & Sons, [1924] 1 Ch 557, 573. A contract is generally voidable at common law if it is made by a natural person without capacity because of age (Mills v IRC, [1975] AC 38, 53) or mental incapacity (Chitty on Contracts (cit sup) vol 1 at paragraph 8-069, Goff & Jones on Unjust Enrichment (8^th Ed, 2011 paragraph 24-09) or drink (Goff & Jones (cit sup) paragraph 24-12). It can be ratified if and when the person becomes of age or mentally capable or sober, and it is in any case binding on the other party. Accordingly, the person who seeks to assert a positive case that the contract has been avoided must prove it. Where there is an issue about a testator’s capacity, once the will has been challenged on this basis his competence must be proved by the party asserting it: Halsbury, Laws of England (5^th Ed, 2010) vol 103 paragraph 899. If assistance as to the burden of proof about the legal entity’s capacity is to be found in the law about natural persons, this is the closer analogy.

Article 2.285 of the DCC provides that a stichting “is a legal person created by a legal act which has no members and whose purpose is to realise an object stated in its articles using capital allocated to such purpose”. Article 2.286.4 requires that the articles of a stichting include (inter alia) its “object” (or “het doel”). By article 2.14 of the DCC, “a resolution of a constituent body of a legal person that is contrary to the law or the articles shall be null and void, unless another consequence follows from the law”. Under article 2.16, “If the resolution is a juridical act of the legal person directed at the other party … the nullity or avoidance cannot be raised as a defence against such other party, if the latter was neither aware nor ought to have been aware of the defect in the resolution”. Consistently with these articles, article 2.7 provides that, “A juridical act performed by a legal person may be avoided if, as a result, its object was transgressed, and the other party was aware thereof or, without personal investigation, should have been so aware; only the legal person can claim avoidance on such grounds”. Articles 2.7, 2.14 and 2.16, being in the first part of book 2 of the DCC apply, as Mr de Groot explained, to all legal entities, including stichingen.

The starting point for considering the capacity of Vestia is therefore the articles of association, and in particular the articles that I have set out in paragraphs 39and 40. Their core object is stated to be “to operate exclusively in the field of social housing” in article 3.2, which echoes the wording of section 70 of the Housing Act. (Although, following the translations agreed between the parties, I have used the term “public housing” when setting out section 70 at paragraph 23 above and the term “social housing” when setting out article 3.2 at paragraph 39, the wording in Dutch is identical: “uitsluitend op het gebied van de volkshuisvesting werkzaam te zijn”. I shall adopt the term “social housing”). There is no definition or elucidation of the term “social housing” in the Housing Act, but its interpretation is informed, as Professor Dorresteijn and Mr de Groot agreed, by reference to the BBSH and in particular the statement in article 11.2 of what is encompassed, and exclusively encompassed, by the field of social housing. Vestia’s articles of association do not refer to financial management except in article 13, and article 11.2 of the BBSH does not cover it. Therefore, as Mr Howe accepts, it is not within Vestia’s object itself, nor is it specifically permitted by the articles, to enter into transactions such as those with Credit Suisse. Nor, it should also be said, does anything in the articles specifically restrict how Vestia can raise money or manage their finances.

Credit Suisse have two arguments that the disputed transactions are within Vestia’s capacity under Dutch law:

Schematically the difference between Credit Suisse’s alternative contentions is that the first is directed to whether the disputed transactions were an aspect of financial management that is itself covered by the statement of Vestia’s object in article 3.3, whereas the second focuses on whether they are to be seen as means to achieving Vestia’s object. However, I see little if any difference of substance between the two contentions: I propose to consider first the “secondary acts” contention.

However, it is convenient first to deal with an argument that was advanced in the reports that Mr de Groot prepared before trial and in Mr Howe’s written opening. I hope that I state it fairly, although I do not find it easy to understand. Mr de Groot considered that, when deciding whether Vestia had capacity to enter into the dipsuted transactions, it is not right to focus on whether Vestia transgressed their object in entering into them, and the proper approach is to consider whether Vestia could enter into the transactions primarily by reference to articles 21 and 22 of BBSH. His reasoning is that, because Vestia are an admitted SHA, their activities are to be assessed by reference to the performance fields. Most of them (what Mr de Groot called the “Executive Performance Fields”) are covered by article 11.2 of the BBSH, and so by article 3.3 of the articles of association. However, the performance field of financial management is not dealt with in article 11 of the BBSH, but in article 21. Accordingly Mr de Groot reasoned (at paragraphs 189 and 190 of his first report dated 15 November 2013) as follows:

“The Performance Field of financial continuity therefore has a different scope from the Executive Performance Fields. This aspect is relevant because in order to answer the question whether there has been a transgression by Vestia of its object by entering into the Disputed Transactions, one has to determine whether the Disputed Transactions should be regarded in the context as formulated in the Articles or within the context of financial management. In other words: should the Disputed Transactions be assessed within the set of rules which are related to the object, or within the set of rules which concern financial management?

In the first case, the check would be against the public law rules concerning the permitted activities for SHAs (mainly articles 11-12a and 12b BBSH and Ministerial policy rules) and against the Articles of Association (which should reflect the rules set out in the Housing Act/the BBSH and the Ministerial rules). In the second case, the check would also be against the financial regulation as set out in the BBSH (mainly articles 22-23 and 26) and the financial clauses in the Articles of Association (in the case of Vestia, article 13, which refers explicitly to the applicable Ministerial conditions), and therefore should not concern the question whether the activity was or was not permitted by the object, but whether the activity fits within the rules stipulated for SHAs’ financial management”.

The argument that the financial activities are governed by articles 21 and 22 rather than the articles of association was not put to Professor Dorresteijn when he was cross-examined. Mr de Groot appeared to back away from this view in cross-examination, and Mr Howe apparently abandoned it in his closing submissions. In an addendum to his report produced during the trial immediately before the Dutch law experts gave evidence, Mr de Groot had stated that, while he concluded that financial activities were not “comprised within Vestia’s object”, he also considered that the last point in article 3.3 of the articles of association is “capable of including financial activities as a means to achieve Vestia’s object”. In cross-examination he agreed that, if financial activities are covered by the last point in article 3.3, then the question whether the disputed transactions are within the category of transactions or financial activities that Vestia can do depends on what the articles of association mean. He explained that he had referred to articles 21 and 22 for this reason: that a SHA clearly has to have financial operations in order to achieve its object of operating in the field of social housing, and therefore financial activities are to be seen as means to achieving the object (under the last point in article 3.3) or as secondary acts under the principle explained in the De Wereld and Playland cases.

Thus, what had been presented as an entirely distinct approach to the issues about Vestia’s capacity was recast as an observation about the two arguments set out at paragraph 190 above. In deciding whether what is covered by article 3.3 or the secondary acts principle in its application to a SHA operating “within a public law system”, articles 21 and 22 are relevant in that, as it was agreed by Professor Dorresteijn and Mr de Groot in their joint memorandum, these articles “provide a standard for the financial activities in SHAs”. I understood that in the end Mr de Groot’s evidence went no further than this, and I accept that agreed evidence. If he did go further, then I prefer the evidence of Professor Dorresteijn, and in particular his evidence that questions about Vestia’s capacity are questions of private law rather than public law and that what he called “the public law environment” is only a consideration potentially relevant to an assessment as to what is within their capacity. I consider later its relevance to Vestia’s capacity to enter into the disputed transactions, but the concept of “secondary acts” is a concept of Dutch private law. It has nothing to do with the public law concept of “secondary activities”: that is about what sorts of activities might be covered by their operations without going beyond their role of exclusively providing public housing, questions where the MG circulars are relevant. Even if financial activities were secondary activities (or side activities) in this sense and they were be permissible for a SHA as a matter of public law, it would not follow that they are therefore secondary acts that the SHA had capacity to undertake as a matter of private law.

I must therefore consider the Dutch law about “secondary acts”. In the Playland case the Dutch Supreme Court said this:

“The Court of Appeal has taken as the basic principle … that, when answering the question whether the object has been transgressed, the way in which the objects are described in the Articles of Association alone is not decisive but that all the circumstances should be taken into account. This basic principle is correct. Equally correctly the Court of Appeal has added to this that, in particular, it must be taken into account whether the interest of the company is served by the relevant legal transaction.”

(I have slightly adjusted the agreed translation of this passage to clarify the meaning.)

The parties were in agreement on four points about how the basic principle is applied. First, as is reflected in the part of the judgment that I have cited, acts by an entity that are considered to transgress its object are typically characterised by solely serving the interests of others. The point is stated as follows in Lennarts’ Text and Commentary on the Dutch Civil Code, which Mr de Groot described as an explanatory book which is commonly used by Dutch lawyers: “one cannot automatically state that a juristic act which is contrary to the interest of the legal entity is for that reason considered a transgression, An act which is (only) aimed at the interest of others, as opposed to the legal entity itself, will often be considered to transgress the object”. Per contra, Lennarts also says that “When the interest of the legal entity is served with the concerned juristic act, a transgression will not easily be accepted”. Professor Dorresteijn put it this way: “If [juridical acts] actually serve the interest of the legal persons, they may well be deemed to be covered by the object as ‘secondary acts’”. Of the cases in the Dutch courts that were drawn to my attention, it was concluded that the entity lacked capacity only in cases where the transaction was apparently for the benefit of a person other than the entity and the counterparty. Thus, in the decision of the Amsterdam Court of Appeal of 22 March 1984 in Nesolas BV v Rabohypotheekbank NV a company had granted a mortgage as security for the private debt of the director and his wife; in the decision of the same court of 27 November 1986 in Credit Lyonnais Bank Nederland BV v Maatschappij voor Nederlandsch Grondbezit BV mortgages were granted as security for a loan to another company controlled by the same director and shareholder; in the decision of the Rotterdam District Court of 24 February 2000 in Diepvries Goedereede BV v VOF D Plugge a company had been paying the debts of its predecessor in business, which had been bankrupt; and in what was generally called the Foundation X case decided by the Utrecht District Court on 1 December 2010 a stichting concerned with healthcare and related services had paid away €2.25 million in circumstances where it had no obligation to do so and, as Professor Dorresteijn agreed, the payment was “pretty much gratuitous”.

Secondly, what matters is the substance of transactions, not the label that they are given. If in substance a transaction was outside Vestia’s capacity, it does not matter that it could properly be labelled or categorised as “banking” or “financial management”.

Thirdly, it is not, I think, in dispute that the question whether an act served the interests of an entity is judged objectively. This was confirmed by Professor Dorresteijn’s unequivocal evidence in cross-examination, and Mr de Groot certainly expressed no contrary opinion. It is not a question of the purpose with which the act was done: Vestia submitted that it appears from the evidence of the experts that the characterisation of a transaction as “hedging” or “speculative” may “involve some degree of consideration of the purpose of the transaction” although “That purpose … is often revealed by objective terms of the transaction”, but I did not so understand the evidence and overall I do not consider that the Dutch authorities to which I was referred provide any support for this submission. In the end, however, it would not make any difference to my conclusions if I had accepted Vestia’s submission about this.

Fourthly, the question whether an act serves the interest of the entity is judged as at the time that the act was done (or, in this case, when the transaction was made) and without regard to hindsight: as it was put, the assessment is ex tunc and not ex nunc.

Subject to that last qualification, all circumstances are properly to be taken into account. This is clear not only from the passage of the Playland judgment that I have cited, but also from the earlier De Wereld case. That was concerned with whether the receiver of a life insurance company, conveniently referred to as De Wereld, could dispute the validity of mortgages given to a bank or the loans to De Wereld that they secured. The summary of the case in the law reports states that, “All circumstances need to be taken into account to respond to the question whether a specific legal act exceeded the object of the legal entity. The manner in which the object is described in the legal entity’s articles of association is for that purpose not the only deciding factor. The ruling of the Court of Appeal that borrowing money as part of a mortgage can be considered as part of the legal entity’s object under the articles of association, if that object is acting as a life insurer, does not amount to an incorrect interpretation of the law”. I should explain that under the Dutch legal system the Supreme Court is a court of cassation, and therefore does not re-examine the facts of cases before it and is concerned only with whether the law was correctly interpreted by the lower court, one of the four courts of appeal.

The Advocate General observed that what is now article 2.7 of the DCC (and had been article 2.6 in the version in force at the time relevant for the De Wereld case) means that a claim of nullity requires two conditions to be met: “The first condition is that the disputed legal action cannot serve towards realising the company object of the legal entity; the second, that the other party knew – or could not have been unaware – that the company object had not been complied with”. The main question that the Supreme Court was to resolve about the first condition is explained in paragraph 12 of the submissions of the Advocate General. There were two views about the meaning of “object” in the article. One view, the “narrow” view, was that the focus was on the statutory definition of the company’s object, whereas the broad view was that “the statutory description of the company object is not the only issue, the predominant issue is the “actual” company object of the legal entity”. The Supreme Court supported the broad view: “… it should not be considered to be ruled out that a life assurance company, in order to meet its liquidity needs and in particular in order to make certain investments, should contract though mortgaged lending”. Professor Dorresteijn explained that as a result of this decision and the subsequent Playland decision the question whether an act is expressly covered by the description of the entity’s object in its articles is “outdated and not very relevant any more”, and has essentially been replaced by the question whether the act serves the interests of the legal entity.

The Playland case arose because a company, Playland BV, had instructed a lawyer to prepare the transfer of shares of both shareholders but later refused to pay for the services on the grounds that its object was transgressed. The object was stated in the articles of association to be, “to import and export and to operate gaming machines as well as to carry out all transactions that are connected or (can be or) are appropriate for or conducive to the foregoing in the broadest sense, explicitly including participating in, financing, conducting the management of and providing services to other enterprises and companies with a similar or related object”. The Court of Appeal concluded that the share transfer safeguarded the continuity of the business and thus was in the interests of the company, and that it did not transgress the company’s objects to instruct the lawyer. This decision was upheld by the Supreme Court. I should refer to two points in the submissions of the Advocate General:

Mr Howe, therefore, submitted that the test in Dutch law about whether an act is within an entity’s capacity because it is a secondary act is a broad and flexible one, and is usually satisfied unless the act is only in the interests of other people than the entity. Nevertheless, he accepted that in the case of the transactions with Credit Suisse these requirements must be met:

Although the second requirement is easy to state, to my mind it is not easy to apply in concrete cases. Professor Dorresteijn said in cross-examination that an act is not, in this context, considered to be reasonably conducive to the entity’s object if it was not itself conducive to the object itself but only to the means to achieve the object: on this basis, Mr Davies submitted that Professor Dorresteijn did not accept that it is enough that the act was “merely incidental to the incidental”. I cannot accept that. What would it mean in application? It is common ground that a SHA has the capacity to enter into hedging transactions, not because its objects directly include such activity but because it is a secondary act that is a means of achieving a core object. But, this being so, it would make no sense if the SHA could not employ anyone to conduct its hedging transactions, although to do so might be said to be “incidental to the incidental”; nor would it make sense to my mind if the SHA would not place an advertisement or engage an employment agent to recruit someone to conduct its hedging activities or make pension arrangements for such an employee, although Mr Davies might characterise such activities as incidental to the incidental to the incidental. Professor Dorresteijn conveyed the broad principles applied by Dutch law. In particular, and importantly, he said and Mr de Groot agreed that an act conducive only to making profit could not be regarded as therefore being conducive to achieving the object of a SHA: a SHA can properly enter into a transaction with the purpose of making a profit only if it is a profit on its core activity or on a side activity that is legitimate, having been approved by the Minister. I accept that, but I did not understand Professor Dorresteijn to say that the principles can be applied as rigidly as Mr Davies’ submission might suggest. If he did, I would be unable to accept that part of his evidence. I do not consider that Mr Howe’s more flexible formulation of the second requirement was refuted by Professor Dorresteijn, and I accept it. A more rigid requirement would make neither commercial sense nor common sense. (I do not overlook that the term “conducive” apparently derives from the articles of association of Playland BV, but the evidence of the experts did not suggest that the notion should not therefore be adopted more generally, and neither party so argued.)

Mr Howe argued that since the requirements stated in paragraph 203 were met and the disputed transactions were capable of serving the interests of Vestia, they had capacity to enter into them. Mr Davies, relying on Professor Dorresteijn’s evidence, submitted (i) that the question is whether Vestia’s interests were in fact furthered by the act in question, rather than whether the act was capable of doing so; and (ii) that, when deciding whether they did further Vestia’s interests, it is relevant that Vestia are a Stichting and an admitted SHA, that has “semi-public” status and whose field of operations is carefully regulated.

Professor Dorresteijn explained, and I accept, that the test established in the Playland case is whether the act actually serves the interest of the entity: the Supreme Court endorsed the statement of the Court of Appeal that “it must be taken into account whether the interest of the company is served by the relevant legal transaction”. The distinction between this test and that advanced by Mr Howe of being capable of serving the interest of the entity is, I think, finer than might at first appear to be the case, given that the matter is to be examined “ex tunc” (see paragraph 199above): in my judgment it is not crucial in this case. However, I see no reason to depart from the formulation in the Playland case, and I am unpersuaded by this part of Mr Howe’s argument. I recognise that in the De Wereld case the Advocat General formulated the first question raised by article 2.7 (then article 2.6) of the DCC in terms of a condition that the disputed action “cannot” serve the company object of the legal entity, and in the Foundation X case (which post-dated the Playland case) the Court stated that the payment of €2.25 million “cannot be reconciled with the realisation of [the Foundation’s] objects”. But in my judgment this choice of words cannot bear the weight that Mr Howe would place on it, and provides no proper basis for qualifying what the Supreme Court said in the Playland case or for rejecting Professor Dorresteijn’s evidence on this point.

What is the significance in this context of Vestia being a stichting? It was common ground between Professor Dorresteijn and Mr de Groot, recorded in their joint memorandum, that one of the “important considerations” when considering whether the secondary acts doctrine covers the disputed transactions is “that Vestia has the legal form of a foundation”. However in his closing submissions Mr Howe criticised Vestia for exaggerating the importance of this, and submitted that in principle and practice there is no difference in how the legal principles about capacity are applied to stichtings from other Dutch legal entities, the Besloten Vennootschap ("BV": private company with limited liability) and the Naamloze Vennootschap ("NV": public limited company). I accept that the test formulated by the Supreme Court in the Playland case applies in principle to secondary acts of stichtings: this is demonstrated by the decision in what was referred to in the Holy Land Foundation case, a decision of the Arnhem District Court of 30 January 2008. It concerned a stichting the object of which was (in summary) to keep alive the memory of Jesus Christ and which had a museum for that purpose. It was subject to episcopal supervision, but, following disputes because its work was increasingly focused on religions other than Christianity, it formed a new foundation that was not subject to such supervision. It divested to the new foundation the management of the museum. In deciding that this decision was within the objects of the Holy Land Foundation, the Court’s starting point was that “the objects in the articles of a legal entity cannot be isolated from all the circumstances, which should be taken into consideration”, which, as Professor Dorresteijn acknowledged, is in essence the test formulated in the Playland case. The Court decided that it was in the interests of the Holy Land Foundation to divest itself of management of the museum because it safeguarded the continuity of its enterprise.

The decision has been criticised: Mr J M Blanco Fernández, a lecturer at the Van der Heijden Instituut and attorney-at-law, said that it applied to a stichting criteria that were developed for commercial law transactions. Professor Dorresteijn thought that the court had been right to apply the Playland doctrine in the case of a stichting, but he agreed with Mr Blanco Fernández that in such a case “the wording of the object … must have greater weight than the wording of the object of other legal entities”. He considered this view supported by what he called the “non-profit nature” of a stichting: that is to say, because a stichting cannot distribute profits. As Professor Dorresteijn put it in his first report, “the non-profit, charitable and/or social nature of a foundation may lead more easily to issues of whether juridical acts are covered by the object of and the more restricted purpose of foundations in comparison with commercial entities”. I do not overlook that (as Mr Howe emphasised) (i) that a stichting may run a business without any charitable, social or quasi-public associations (an example being the Stichting Online Gaming Nederland, the trade association for online gambling), and (ii) that a stichting can make profits, its “non-profit nature” being that they cannot be distributed to founder, members or other persons. (Mr de Groot cited the practitioners’ textbook, Handboek Stichting en Vereniging Hamers (2013): “The foundation may make payments to third parties provided they have a charitable or social purpose”.) However, this does not answer Professor Dorresteijn’s evidence that in the case of a stichting, Dutch law less readily expands upon, or interprets liberally, the object as stated in the articles of association. Indeed, I cannot understand why else the fact that Vestia are a foundation is, as the experts agreed, an important circumstance with regard to the application of the secondary acts doctrine.

Professor Dorresteijn and Mr de Groot also agreed that it is an important circumstance in applying the Playland doctrine in this case that “Vestia operates in a highly regulated area”, and the relevant circumstances in applying the secondary acts doctrine include both the statutory framework and the views expressed by ministers in the MGs. It is not immediately apparent why these public law considerations are relevant to defining what secondary acts are, as a matter of private law, within Vestia’s objects, but it was explained by Professor Dorresteijn in his second report: the core object of an admitted SHA is to provide social housing, not to make a profit, and it is outside its object to undertake an activity with a view to making a profit even if that purpose is to use the profit for social housing. The regulatory framework informs what activities are to be regarded as being in the interest of that core object. The nature of acceptable secondary activities is elucidated in article 11(2) of the BBSH and the ministerial views about them are expressed in the published guidance. As Professor Dorresteijn put it, “… the interest of Vestia as a Social Housing Association is tested against what the Social Housing Association is supposed to do and where it is bound by statutory regulations, whether it stays within the area of public housing”. However, as for ministerial guidance, in the end, as Professor Dorresteijn said and I accept, “Although the circular letters can be helpful for interpretation of the listed activities [sc. the activities listed in article 11(2)], they cannot supersede statutory regulation”. (Professor Dorresteijn expressed some unease about some of the guidance in which the Minister might appear to be expanding on the activities provided they have his approval “because extending the operational area really requires legislation”.)

With regard to financial activities, articles 21 and 22 inform what transactions may be regarded as contributing to the object of operating in the field of social housing, and require the SHA to implement a policy to ensure its continuity financially. In the circumstances the Minister stressed that therefore only “acceptable” and “therefore limited” risks were permissible (see MG 94-46), and “open-ended constructions”, which are more a form of speculation were not (see MG 94-31). (The meaning of “open-ended” was not explored: it probably simply refers to a position that is not hedged and so is exposed to market changes. But the term was not relied upon by either party: I can ignore it for present purposes.)

When he was cross-examined, Mr de Groot criticised Professor Dorresteijn’s evidence that the regulatory context requires a more restrictive application of the secondary acts doctrine. He expressed the view that Professor Dorresteijn was unnecessarily complicating the test as to whether a particular act helped to achieve the entity’s object. I find that criticism difficult to reconcile with his views expressed in the joint memorandum: it is common ground that the regulatory framework is important when considering the application of the Playland doctrine, and I accept that this is for the reasons that Professor Dorresteijn explained. I therefore accept Mr Davies’ submission that Vestia’s capacity to enter into financial transactions is the more strictly limited because they are a stichting and perform a regulated public role.

I have considered what acts are within an entity’s capacity under Dutch law by reference to the secondary acts doctrine explained by the Supreme Court. It was not, I think, argued and in any case I would not accept that Vestia have any greater capacity that is relevant because of article 3.3 of the articles of association, and I need not consider article 3.3 separately. It would not be consistent with the Explanatory Memorandum on article 11(2)(a) of the BBSH (see paragraph 28 above) to give article 3.3 a wide interpretation.

Vestia’s case, as pleaded in their defence, is that:

Mr Howe submitted that the distinction that Vestia draw between transactions that “genuinely constituted hedges” and speculation is a false one. I accept that, if not false, it is certainly an elusive one, and to my mind it did not prove to be a useful one: see Standard Chartered Bank v Ceylon Petroleum Corp, [2012] EWCA Civ 1049 at paragraphs 13-23. It tended to distract from the important question, which is whether the contracts comprising the disputed transactions were within Vestia’s objects.

The defence goes on to plead that “In this respect Vestia … refers to its [Financial Regulations], which required it to pursue a largely risk averse policy and which stipulated that derivatives could only be used for limited purposes, in which they had the character of an insurance instrument”; and that the disputed transactions “failed to hedge Vestia’s legitimate exposure as a housing association, by reducing its existing exposure to risks or otherwise and/or did not have the character of an insurance instrument”, and therefore were outside Vestia’s capacity. To my mind nothing significant is added by the reference to the provision of the Financial Regulations about derivatives having “the character of an insurance instrument”. It is not clear to me quite what is meant by that expression: Mr Grove and Mr Dulude agreed that it is not it is not “a market standard [term] with a clear meaning”. There is some evidence in A&O Amsterdam’s letter of 14 March 2007 (see paragraph 76above) about what Dutch law regards as the defining characteristics of an insurance contract, and they observed that as a rule a “credit default swap” would not qualify as an insurance contract under Dutch law. It suffices to say that I did not understand Mr Davies to contend that because of the Financial Regulations Vestia did not have capacity to buy instruments that otherwise it would have been within their capacity to buy, and in my judgment he was right not to do so.

It was also common ground between Professor Dorresteijn and Mr de Groot that the use of derivatives by SHAs is not prohibited per se, and Vestia accept that they have capacity to buy some derivatives in some circumstances. This is in line with two other pieces of evidence: one is the advice of A&O Amsterdam. The other is a paper entitled “Capacity Issues in Derivative Transactions” published in 2004 by Ms C W M Lieverse and Ms M G van’t Westeinde, two Dutch attorneys in the firm of Loyens & Loeff. They examine the capacity of entities to enter into derivative transactions by way of secondary acts. In section 7 of their paper, they consider specifically the capacity of housing corporations, by which they mean admitted institutions within section 70 of the Housing Act. They recognise that many financial transactions will be secondary acts within the capacity of a SHA:

“There is no doubt that the entering of financial transactions in general fall under this category. Housing corporation [sic] must frequently perform loans and must take care of an adequate capital and liquidity management. After all, there is a continuous inflow and outflow of cash which must be coordinated. Derivative transactions can play an important role herein and the performance of such in our opinion can be part of the intended activities and thus in principles fall within the objects clause”.

They go on to consider the circular MG 94/31, and comment:

“We believe this wording is very clear. Housing corporations may only perform derivative transactions with the aim to hedge interest rate and other financial risks, which a corporation may be confronted with, and to make such risks manageable. Speculative transactions (whether or not with an open end character) that (can) have no relation with the management of the financial risks of a corporation are prohibited”.

They continue under the heading “Civil consequences”:

“It can be derived from the terms used in the circular of 20 July 1994, that (speculative) derivative transactions which are not (cannot) be in relation to the management of the financial risks of a housing corporation, are not in the interest of social housing and thus fall outside of the object of a housing corporation”.

Vestia accept, therefore, that they have capacity to enter into “transactions which genuinely constitute hedges against its borrowing liabilities”. It is not entirely clear what this expression is intended to encompass. But to my mind it certainly covers:

Of course, as was observed by Mr Grove and much emphasised by Mr Curran, in one sense every investment decision carries some risk, and a decision to hedge might be described as a speculation: if, for example, a person hedges against the exposure to interest rate fluctuations on borrowings at a floating rate of interest, he risks not benefitting from a fall in interest rates. But under Dutch law Vestia have capacity to make hedging transactions because they are secondary acts and are conducive to their main objects: I consider it readily understandable that therefore it would be within their capacity to hedge against risks arising from the carrying out of the main objects. An obvious example is against the risks from a mismatch between borrowings required to provide housing, which might well be at floating rates of interest, and rental income, which typically does not fluctuate correspondingly but is broadly fixed in nature; but it is no more than an example.

In view of my conclusions about Dutch law I accept subject to a qualification explained at paragraph 220 what is apparently the general thrust of Vestia’s pleaded case, in that Vestia have capacity to invest in financial instruments of the kind with which this case is concerned only if they are properly to be regarded as “hedging instruments”, notwithstanding they were likely to prove profitable because of market movements. However, this does not mean that I accept that Vestia’s capacity was as restricted as Vestia plead.

Moreover, the risk resulting from the floating interest rates on some of Vestia’s borrowings was not only that rates would increase. They also faced exposure to the risk of illiquidity if rates fell and obligations to provide collateral (such as those under the Master Agreement) were triggered. However, Mr Davies made clear in his final submissions that, by pleading that they had capacity to enter into transactions that “genuinely constitute hedges against their borrowing liabilities”, Vestia did not intend to accept that they had capacity to enter into transactions that mitigated their exposure to this risk. This exposure is not a theoretical risk that Credit Suisse have conjured up with hindsight. In Vestia’s 2008 accounts it was reported that “As a result of the negative market value of derivatives at the end of [the year], Vestia was running a liquidity risk because Vestia had to pay liquidities as collateral to banks”, and there were similar statements in the 2009 and 2010 accounts. Concern about this is also reflected in internal reports of Mr de Vries. By the end of 2010 Vestia had deposited €123 million with banks as collateral because of the negative market value of their instruments, whereas at the end of 2009 they had deposited only €49 million. There is no cogent reason that Vestia’s objects should be understood to allow them to enter into arrangements to protect themselves against rising interest rates but not falling interest rates. Whether transactions that protected Vestia from providing collateral when interest rates fell are to be characterised as “hedging” is not the important point, but I include them within the expression for the purposes of this judgment.

However, it is not easy to define what transactions are to be regarded as reducing the risk of illiquidity. It might be said that any transaction that has the effect of reducing Vestia’s expenditure for any period or any transaction that increases their receipts for any period has the effect of reducing the risk to Vestia that their cash-flow will prove during that period to be inadequate to meet their needs. However, I cannot accept that all such transactions are to be characterised as transactions that reduce risk: that is more likely to be an incident of a transaction rather than a defining characteristic of it. It seems to me that, if a transaction is to be characterised as a risk reducing transaction because it reduces a risk of illiquidity, it must fit into a strategy of mitigating an identifiable risk of this kind.

It is important to recognise, as was explained clearly by Mr Grove but is in any case obvious, that an entity such as Vestia cannot realistically be expected to hedge risks simply by entering into transactions designed to match, and to protect itself on exposure from, a particular loan or other transaction. It will more sensibly wish to manage its risks on a portfolio basis, and this is what they did: they explained this in their 2008 accounts (see paragraph 57), and it was also clear from Deloitte’s report on their 2009 accounts and their 2010 accounts, which said, “Vestia hedges the variability of cash flows on a ‘portfolio’ basis. Consequently, Vestia manages its total interest rate exposure with a ‘portfolio of derivatives’”. This requires that a more sophisticated view be taken about what constitutes a hedging transaction and what instruments are to be regarded as hedging instruments. Most obviously, it means that the manager of such investments will look at the overall exposure to risks of different kinds at different times and ensure that overall the exposure is not excessive. (In the case of Vestia, and other SHAs that participate in the WSW, as far as borrowing risks are concerned excessive exposure would apparently be regarded as exposure with regard to over 85% of borrowings.)

It also seems obvious to me that sensible management of a hedging portfolio does not only involve acquiring hedging instruments that might operate to reduce or eliminate risks either from a specific borrowing or other commitment or potential commitment or from the entity’s overall portfolio of borrowings. It will, for example, also involve cancelling a hedging instrument or restricting its operation. This might be sensible for a variety of reasons: for example because a borrowing facility has not been used or has been repaid or because the market has presented the opportunity to provide alternative protection more economically (perhaps through protecting it in combination with hedging other risks). It would, to my mind, be commercially unrealistic to conclude that a transaction is within Vestia’s capacity only if, taken in isolation from their general hedging programme, it reduces their exposure to risks. In my judgment, given the common ground that Vestia have capacity to hedge risks, it follows that a transaction is within their capacity if it is part of a strategy that reduces Vestia’s exposure to risks, or, as it might be put, a hedging strategy. It is also, in my judgment, the implication of the evidence of Dutch law. Although, for example, a decision and transaction to rescind or amend hedging arrangements as part of a strategy to put in place other arrangements for hedging on a portfolio basis might be characterised as “incidental to what is incidental” to Vestia’s object, I have rejected that as a test of the limits of an entity’s capacity.

Therefore the question whether an investment would be within Vestia’s capacity does not depend on the nature of the instrument taken in isolation. It might be that the nature of some investments means that they are more likely to have the effect of hedging exposures than others: for example, it is readily understandable that a simple payer swap would probably fit into Vestia’s portfolio as a hedging instrument. But it is difficult to imagine a derivative that could not in any circumstances take effect as a hedge because there is always a possibility (if a remote one) Vestia might have had a corresponding instrument in their portfolio which exposed them to risks that were eliminated or reduced. Mr Grove gave an example: at first blush, receiver swaps might appear to be inconsistent with a policy to fix interest rates, but they might be bought to re-balance the derivatives portfolio to reflect changes in the composition or size of the assets or to reflect changes in the nature or extent of their liabilities. In other words, a receiver swap might be bought as part of a coherent hedging strategy so as to ensure that payer swaps appropriately matched (and only matched) exposure to rate movements.

Mr Grove and Mr Dulude agreed in their joint memorandum that ‘hedging’ describes the activity that an end-user counterparty undertakes to reduce its exposure to market risks. They observed that counterparties might have more than one aim when they buy derivatives, and that, while the primary purpose might be to hedge against adverse market risks, they might also use derivatives “to further a secondary goal of reducing funding costs or otherwise improving their financial position by taking a view … on future market movements …”; and they both accepted that “selling options to minimize the cost of hedging instruments would be accepted treasury management practice as long as it is consistent with the policy of the board …”. Although it was of interest to have the expert witnesses’ views about what would generally be regarded as appropriate or acceptable practice, this is not directly relevant to what I have to decide: about whether, given Vestia’s pleaded case as to what transactions they had capacity to enter into, the transactions were within their objects. As I have explained (see paragraph 198above), questions of Vestia’s capacity do not depend on the purpose for which they entered into transactions but on an objective assessment. Although at one point in his report Mr Grove wrote that “‘hedging’ includes efforts to ‘reduce’ risk as well as efforts to ‘eliminate’ risks” (emphasis added), I do not understand Credit Suisse to argue (or Mr Grove to have meant) that it suffices that the investment in a derivative was made in a (perhaps misguided) effort to reduce or eliminate a risk: that would impermissibly introduce a subjective element into the test of what transactions were within Vestia’s capacity. A fortiori, a transaction might constitute a “hedge” and be within Vestia’s capacity if the primary purpose (or a purpose) was to hedge against exposure to adverse market movements, notwithstanding a secondary (or second) purpose of improving their finances by taking a view on market movements.

Mr Dulude was instructed to write a report addressing (inter alia) the question “Did Vestia have capacity to enter into the Disputed Transactions?” In response he observed that “At Vestia, given the nature of the activities, ‘hedging financial risks’ largely boiled down to minimising EUR interest rate risk which arose as a result of it owning real estate assets providing long dated fixed rate cashflows (social housing rental income) against long-term floating rate borrowings. …. In order to hedge this financial risk Vestia could do one of three things: a) Borrow on a fixed rate basis; b) Convert the floating rate loans into fixed rate products using interest rate swaps; or c) Buy options that benefit from rising rates (caps and payer swaptions).” I do not doubt that Mr Dulude identified a, and probably the, major financial risk that Vestia faced and identified the most obvious ways in which it might be managed. However, I accept Mr Howe’s submission that this does not define the limits of Vestia’s capacity and at times Mr Dulude’s evidence seemed to assume that it did. Moreover, and importantly, Mr Grove said in his evidence and I accept, Vestia’s borrowings included, as well as loans at a simple fixed or floating rate of interest, “structured loans”, that is to say borrowings for which Vestia paid interest calculated by reference to a formula, including borrowings for which they paid interest calculated by reference to a spread between CMS rates.

Finally, I need hardly add that the question what transactions are within Vestia’s capacity does not depend on whether accountants would consider that an investment was a hedging instrument for the purposes of the principles governing hedge accounting: there different tests apply. Accounting standards do not purport to define what is and what is not a hedging instrument for any purpose relevant for present purposes, but to stipulate what qualifies for treatment as a hedge for accounting purposes.

I therefore come to the question whether Vestia had the capacity to make the five controversial contracts, that is to say the first five of the seven investment contracts with Credit Suisse. In my judgment, in this case the question whether a transaction was within Vestia’s capacity really depends in the end on whether on the balance of probabilities Vestia were acquiring a hedging instrument in the broad sense that I have described. This requires me to consider the nature and circumstances of each of the contracts separately, but before doing so I make some more general observations.

As I have said, the burden of proof is upon Credit Suisse to establish that the transactions were within Vestia’s capacity and therefore to prove that, when making them, Vestia were hedging an (actual or anticipated) exposure. In some cases the proper approach might be that prima facie it is to be taken that investment decisions would be properly made by legal entities and so resulting transactions would be within the capacity of the parties to them, and that this inference might sometimes be sufficient to shift the evidential burden to the party contending that they were ultra vires. This is not such a case. Such an inference cannot be made in view of the evidence from conversations between Mr Dupont and Mr de Vries about how Mr de Vries was conducting Vestia’s investment management: for example, the inference of their conversation of 5 January 2011 (see paragraph 91above) is that Mr de Vries was so arranging matters as to avoid them coming to the attention of Vestia’s auditors, and on 9 June 2011 Mr de Vries was expecting to be sacked (or, allowing for some exaggeration, be in trouble) because the CFV were unhappy with what he had been doing (see paragraph 118). It is clear that on occasions Mr de Vries was entering into transactions because he had “taken a view” on how the market was likely to move. Vestia sometimes appeared to suggest that it follows that those transactions were not hedging transactions. I do not accept that: a simple example would be if a person could not afford to hedge all his borrowings and took a view of the market to decide what risks to cover with his limited resources. But this, to my mind, confirms that I should not assess the transactions on the basis that Mr de Vries is unlikely to have entered contracts that were not within Vestia’s capacity.

Transactions 1 and 2: Vestia would have had capacity to enter into transaction 1 if it were a separate contract. As I have said, it was a plain vanilla payer swap with an effective date of 1 July 2033 and a termination date of 1 July 2058. Vestia had, as I conclude from the evidence, long-term borrowings at floating rates of interest throughout the period from 2033 to 2058. The effect of the swap would be to protect Vestia from the risk that the interest rate during the period 2033 to 2058 might be higher than 1.995%, the interest that Vestia were to pay under the fixed leg of the swap.

Was the contract comprising transactions 1 and 2 beyond Vestia’s capacity because of the impact of the swaption, transaction 2? The impact of the swaption was two-fold. First, it reduced the amount of fixed rate interest that Vestia had to pay under the swap: see paragraph 84 above. That reduced rate does not affect Vestia’s capacity to make the contract. Secondly, Credit Suisse had the option to enter into what would, from Vestia’s perspective, be a receiver swap. Assuming (as is clearly overwhelmingly likely) that Credit Suisse would decide whether to exercise the swaption according to their financial interests, they would exercise it, it must be supposed, if the market at the strike date, 29 June 2033, was above 4.5% (that being the rate of interest that Credit Suisse were to pay under the swap for which they had an option), and not otherwise. If Credit Suisse did not exercise the option, it did not affect the swap: it provided Vestia with the protection as to interest rates during the period 2033 to 2058. If Credit Suisse did exercise the option, interest paid by Credit Suisse under the floating interest leg of transaction 1 and the interest paid by Vestia under the floating interest leg of transaction 2 would be the same in amount and payment dates and could be netted-off under the Master Agreement. Accordingly, in those circumstances the swap would not provide Vestia with the protection as to interest rates during the period 2033 to 2058. The net effect of the fixed interest rate legs of the swap and the swaption would be that Vestia were paid interest of 2.505% p.a. (the difference between the 1.995% p.a. that they were to pay under transaction 1 and the 4.5% p.a. that they were to pay under transaction 2).

Thus, the contract comprising transaction 1 and transaction 2 was likely to provide protection to Vestia in the event that in 2033 the rate was higher than 1.995% but not above 4.5%. In other words it protected against interest rate movements, albeit only in some circumstances. Because it could not be expected to provide protection in all circumstances, the protection cost Vestia less than it otherwise would have done. As I have explained, I consider that such a contract is properly regarded as a hedging transaction, and, more directly important, was within Vestia’s capacity.

Transactions 3, 4 and 5: coming to the contract comprising transactions 3, 4 and 5, I consider first its overall effect until 1 April 2026, which was the termination date of transaction 3 and the effective date for the swap for which Credit Suisse had an option under transaction 5. Under transaction 3 Vestia were to receive (i) during the first period to 1 October 2015 interest at the fixed rate of 5%, and (ii) thereafter interest at a rate governed by the CMS formula. Taking transaction 3 in isolation, they were to pay a floating rate of interest, and in that regard it aggravated rather than mitigated their exposure to the risk of interest rate movements. However, the impact of transaction 4, the swap, was that throughout the period of transaction 3 other than the first six months, Vestia could net off against the interest that they were paying under transaction 3 the interest that they were receiving under transaction 4. Thus, the combined effect of the two transactions until the termination date of transaction 3 in 2026 was that Vestia were to receive (i) the interest of 5% and then (ii) the CMS interest and were to pay a fixed rate of interest of 3.5% p.a..

During this period, transaction 5 did not affect the structure of the transactions. Its impact in financial terms was explained by Mr Grove and Mr Dulude in their joint memorandum, and I accept what they said:

“We agree that Vestia would not have been able to receive a fixed rate of 5.00% for the first four and a half years of [transaction 3], without also entering into [transaction 5]. Without the premium that it earned by entering into the [transaction 5] swaption, the fixed rate that Vestia would have received for the first four and a half years of [transaction 3] would have been lower than 5.00%. In entering into [transaction 3] and [transaction 5], Vestia apparently traded (1) the risk, but by no means the certainty, that the market level of rates at the Exercise Date of [transaction 5] would result in the [transaction 5] swaption being exercised by [Credit Suisse], an unfavourable result for Vestia, for (2) the benefit of a higher, and certain, fixed payment by [Credit Suisse] during the first four and a half years of [transaction 3].”

As I have said, Mr Grove’s evidence was that that Vestia had entered into loans under which they paid interest calculated by reference to a spread between CMS rates: see paragraph 54 above. I should explain that (for reasons associated with the timing of Vestia’s disclosure that I do not fully understand and which are irrelevant for present purposes) Mr Grove had not reviewed the whole of Vestia’s borrowings portfolio, but his evidence is sufficient to demonstrate that Vestia had some borrowing commitments of this kind. He therefore considered that, while it is possible that the transaction simply reflected Vestia’s view that the curve prevailing at the relevant dates would steepen, it is also “quite possible” that Vestia were entering into the contract as a hedge against some curve risk to which they were exposed.However, that is not sufficient for Credit Suisse to discharge the burden of showing on the balance of probabilities that this arrangement had a hedging effect either between 2015 and 2026 when Vestia were receiving interest calculated under the CMS formula or during the earlier period, and there is no other evidence that assists Credit Suisse to do so. Indeed, there is some slight evidence that might indicate otherwise.

First, Mr de Vries told Mr Dupont about the third party loan and the third party swap that provided “context” for the 5% coupon under transaction 3 and for transaction 5. Apparently he made no mention of an arrangement with a third party under which Vestia were paying interest under a formula that provided context for Vestia wishing to be paid a coupon calculated by reference to the CMS formula. If Vestia did have such a facility or other relevant arrangements, it seems to me probable that he would have mentioned it to Mr Dupont as he mentioned the third party loan and the third party swap. Of course, the fact that the 5% coupon corresponded with what Vestia were paying under the third party loan does not assist Credit Suisse: it does not mean that transaction 3 reduced a risk to which Vestia were exposed.

Secondly, the proposal for a CMS arrangement came from Credit Suisse. Mr Curran said that he understood that Vestia were entering into it because they wanted to take advantage of the yield curve, which apparently reflected that long-term rates were lower than short-term rates, and I infer that his understanding derived from Mr Dupont and what Mr Dupont gleaned from exchanges with Mr de Vries. Of course, Mr de Vries might have accepted the proposal because he also saw it as a means of covering some exposure, and in any case (because the important question is whether the transaction in fact hedged an exposure, and not whether that was Mr de Vries’ purpose) it might coincidentally have hedged a risk, But, although Mr de Vries had considerable input as to the terms of transaction 3, this makes it the less probable that this feature of the contract hedged risk.

Against this Credit Suisse relied on a document dated 25 August 2009 (the year “2008” is a mistake), and referenced “Treasury Report of 1 Sept 2009”, written by Mr de Vries for the Vestia’s Treasury Committee in September 2009. It included this paragraph:

“… the term of a number of short-term transactions with a positive market value for Vestia were extended at a lower percentage. This happened because the long-term interest rate was lower at that time. The long-term interest rate has now risen again in relation to the short-term interest rate (steeper yield curve). Already with Fortis alone, these transactions result in being €34 million better-off compared with doing nothing”

Credit Suisse submitted that this document shows that Mr de Vries was concerned about the steepening of the yield curve and its impact on Vestia’s borrowing arrangements, and that it suggested that he was adjusting Vestia’s borrowing in response to changes in the shape of the curve. To my mind, this evidence is not sufficient to support the inference that Credit Suisse seek to derive from it. I do not infer from the document that Mr de Vries had such concerns: he was simply explaining that short-term borrowings have been extended to take advantage of longer-term rates. But, even if Credit Suisse’s interpretation of the paragraph is correct, it reflects Mr de Vries’ thinking long before the contract for transactions 3, 4 and 5. Furthermore, even if Mr de Vries was still concerned about some curve risk in March 2011, this document does not show the shape of any curve to which Vestia were exposed, and that it would be “matched” by, and so mitigated by, the transaction 3.

Does the inclusion of transaction 4 in the contract assist Credit Suisse to demonstrate that the contract was a hedging transaction? The operation of transaction 4, in combination with transaction 3, can be regarded as falling into three periods from 1 October 2011, its effective date.

Thus, during the period to 1 April 2026 transactions 3 and 4 taken together never had any hedging effect. When transaction 3 had terminated, transaction 4 taken in isolation had a hedging effect from 2 April 2026 to 1 April 2056. However, if Credit Suisse exercised their option in transaction 5, then Vestia’s receiver swap would neutralise the payer swap under transaction 4, and transaction 4 would not then have any real hedging effect. In reality Credit Suisse would, naturally, exercise the option if it was in their economic interest to do so: in practice, if the Euribor 6 months’ interest rate was above 3.5% on the strike date, 29 March 2026.

Of course, it is possible that Credit Suisse might not exercise the option, and that after the strike date interest rates might move above 3.5%. In those circumstances the effect of the contract comprising transactions 3, 4 and 5, and in particular the transaction 4 leg of it, would afford Vestia some protection from the movement in market rates, albeit subject to the provisions for early termination. However, it does not seem to me realistic therefore to characterise the contract as a whole as a hedging contract or one that reduces Vestia’s exposure to risks: the protection that might be provided in some circumstances is insufficient to bring the whole contract within Vestia’s capacity. Credit Suisse have not proved that the contract as a whole sufficiently protected Vestia from risk, either viewed in isolation or as part of a portfolio hedging structure.

Transaction 6: my conclusion on transaction 6 as amended really follows from my conclusion about the contract for transactions 1 and 2. As Mr Dulude acknowledged, a cancellable swap is economically tantamount to a payer swap and matching swaption. When it was originally agreed, transaction 6 was for Vestia a “plain vanilla” interest rate swap, and they had the capacity to enter into it. When it was re-structured, the reduction in the fixed rate of interest that Vestia were to pay did not change the nature of the transaction and Vestia had capacity to agree to that change. In my judgment Vestia would have had capacity to enter into a transaction in the terms of the re-structured transaction 6: it would provide protection to Vestia against the risk of interest rate movements, albeit more limited protection than the original transaction 6. Of course, the change in the terms of transaction 6 meant that the protection that it provided to Vestia was curtailed, and in that sense the change viewed in isolation might be said to have increased Vestia’s exposure to interest rate fluctuations after 2021. But, as I have said, I consider that Vestia have capacity to manage their hedging portfolio, and therefore cancel a hedging arrangement that they no longer need or that can be or has been replaced with another instrument that is more economical or otherwise more suitable. It seems to me probable that this is why Vestia sought changes to the terms of transaction 6. I conclude that the changes and the restructured instrument were probably part of their overall hedging strategy, and the contract to change the terms was within Vestia’s capacity.

Transactions 7 and 8: as is apparent from the table at paragraph 17, it does not assist Credit Suisse to show that Vestia had capacity to make the contract comprising transactions 7 and 8. Until 2 March 2026 only transaction 7 was effective, and (like transaction 3) its impact must be considered before and after the CMS formula became applicable on 2 March 2015. Until 1 March 2015 the transaction took effect, from Vestia’s perspective, like a plain vanilla receiver swap, and therefore increased Vestia’s exposure to interest rate movements. Between 2 March 2015 and 1 March 2026, Vestia were still to pay interest at a floating Euribor rate and to that extent it still added to Vestia’s exposure to interest rate movements. The amount that they received depended on the application of the CMS formula.

As with transaction 3, Mr Grove’s view was that transaction 7 might simply reflect Vestia’s view that the CMS curve was likely to steepen, but that it was “quite possible” that Vestia were entering into the transaction as a hedge against some curve risk to which they were exposed; but again that means that Credit Suisse have not shown that transaction 7 had a hedging effect between 2015 and 2026. That is enough reason to conclude that transaction 7 had no hedging effect before 2026, but again (as with the contract comprising transaction 3, 4 and 5) there is some slight support for this conclusion in that Mr de Vries told Mr Dupont that the swaption, transaction 8, corresponded with an arrangement with a third party for a forward starting payer swap and this suggests that, if transaction 7 responded to an arrangement that Vestia had with a third party, Mr de Vries would have mentioned this too. Apparently he did not do so.

What was the impact of the contract after 2 March 2026, that is to say after transaction 7 had terminated and the strike date for the swaption, transaction 8? Clearly, it had none unless Credit Suisse exercised the option. If Credit Suisse exercised the option, then taken in isolation it would increase Vestia’s exposure to interest rate movements.

As I have said, Mr de Vries told Mr Dupont of a swap arrangement with a third party that was to start in 2026, under which they were to pay interest of 2% in return for a floating rate. It is not clear quite what connection Mr de Vries perceived that this arrangement had with transaction 8, but the Euribor rate that Vestia were to receive under the third party transaction would match what they were to receive under transaction 8. The overall effect of the fixed interest legs of the two swaps would be that Vestia would receive 1.55% p.a. more than they were paying. However, it is obvious that transaction 8 did not itself reduce Vestia’s exposure to interest rate movements, and there is no reason to think that it had any part in a broader strategy to do so. As I have explained, Mr de Vries was contemplating selling Credit Suisse a receiver swaption until about 14 June 2011: see paragraph 121above. As Mr Dulude observed, if transaction 8 was part of a hedging strategy, Vestia could not have made a change of this kind: on the contrary, the inference is that the purpose of the swaption was simply to improve the terms of transaction 7.

I conclude that Vestia had no capacity to enter into the contract comprising transactions 7 and 8.

Transaction 9: I do not propose to consider at length whether transaction 9 was by way of a hedge. As is apparent from the table at paragraph 17above, it proved to be profitable to Vestia, and since Credit Suisse have limited their claim to €83,196,829, this issue will not affect the outcome of this litigation.

There is no evidence that transaction 9 covered or mitigated any risk that Vestia faced. It was presented to Vestia by Mr Dupont as a way of “tak[ing] advantage of … market conditions” (see paragraph 117above). The effect of the transaction was that Vestia would suffer losses if Euribor rose above certain levels. It therefore aggravated, and did not mitigate, Vestia’s exposure to interest rate movements.

I add that there is no evidence that the contract was part of a strategy to reduce an identified or identifiable risk of illiquidity. Of course, it is possible that in some circumstances transactions of the kind that Credit Suisse and Vestia made might be part of such a strategy: for example Mr Grove said that transaction 9 might be explained because Vestia were looking to reduce their cost of funding in certain market conditions that they thought would come about. Although it involved taking a view, he reasoned, it would mitigate Vestia’s liquidity risk in some circumstances. However, while respecting the clarity with which Mr Grove put forward this suggestion, it really amounts to no more than speculation. There is no evidence that Vestia faced any relevant risk of this kind when this or any of the contracts were concluded or that any of them was part of a strategy to manage such risk.

Another point was made by Credit Suisse. As I have said, from 2008 Vestia adopted cost price hedge accounting in their annual reports and accounts. It appeared from the cross-examination of Mr Dulude that Credit Suisse rely on the fact that they did so with the apparent endorsement of their auditors in support of their case that Vestia were hedging their exposures and using certain types of instruments in their hedging programme. In a report sent to Vestia on 20 August 2010 Deloitte reported that they had considered whether instruments met the criteria set out in RJ 290 to apply cost price accounting, and concluded that they did so. For this purpose they considered the term sheets of six financial instruments, interest rate swaps with other counterparty banks. They were either simple interest rate swaps or swaps in which the floating rates paid by Vestia were capped and floored, and did not include structured swaps, or swaptions or cancellable swaps. It was suggested in Mr Dulude’s cross-examination that previously Deloitte had considered other instruments, including a CMS structured instrument, and concluded that they satisfied RJ 290, but this is not established by any document to which reference was made: all that was identified was a memorandum of Deloitte dated 22 June 2009in which they said that they had done work which established “the risk factors of a selection of six financial instruments”, including a CMS structured instrument. In a report dated 11 August 2009 Deloitte reported that they had determined that “covered positions and the financial instruments used for hedging are within the remit of RJ 290”. I have seen no document that specifically evidences their views about whether, and if so how, RJ 290 applies to the six financial instruments, but even if it were established that Deloitte examined these instruments, and in particular a CMS structured instrument and that they met the criteria for RJ 290, I would not place any reliance on this conclusion. In so far as Credit Suisse were seeking to adduce Deloitte’s views as providing some sort of expert evidence, permission for such evidence has not been sought or given. I am not in a position to assess the weight to be given to any opinion of Deloitte, the standards of whose work has been challenged and, more importantly, the proper accounting treatment of Vestia’s portfolio has no direct bearing on the questions that I have to decide. In any case, the disputed transactions were not considered by Deloitte. KPMG withdrew their accounting opinion about the 2010 accounts, and auditors did not approve the use of hedge cost accounting for 2011.

For similar reasons I do not rely upon the views and conclusions expressed by Cardano in their report of 7 March 2012. It is not clear what material they considered in reaching their conclusion. Nor do I rely on Mr Greittemann’s evidence about what Mr de Vries told him about how he used derivatives, or his evidence that, when he was seeking to manage the portfolio in and around February 2012, as he saw it “there was no relation between the floating part of the loans and the derivatives portfolio”. This evidence was simply too general to assist in deciding whether particular contracts were within Vestia's capacity.

I therefore conclude that Vestia had capacity to enter into (i) the contract comprising transactions 1 and 2, and (ii) the contract comprising the re-structured transaction 6. Credit Suisse have not shown that they had capacity to enter into the other three controversial contracts: (iii) that comprising transactions 3, 4 and 5, (iv) that comprising transactions 7 and 8, and (v) that comprising transaction 9. I shall call these the “ultra vires contracts”.

If Vestia lacked capacity to enter into transactions, the consequences are determined by English law, the proper law of the putative contracts: see paragraph 185above. The general rule at English common law of a legal entity lacking capacity to contract is that it does not make a valid contract: it is irrelevant if the law that governs issues about what capacity it has (here Dutch law) has a different rule. This is confirmed by the judgment of Aikens LJ in the Haugesund case (loc cit) at paragraph 60. Credit Suisse submit, however, that it is an over-simplification to assume that the general rule applies in a case such as this, and that to do so does not properly recognise Vestia’s legal personality.

Credit Suisse’s argument is that, as is demonstrated by statutory modifications of the common law, English law recognises that it should not apply to all legal entities a blanket rule that contracts that are ultra vires are necessarily invalid. Thus, the Companies Act 2006 provides by section 39 that the validity of an act by a company “shall not be called into question on the grounds of lack of capacity by reason of anything in the company’s constitution”, and by section 40, in relation to the power of a director to commit a company to acts outside its capacity, that “In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or to authorise others to do so, is deemed to be free of any limitation under the company’s constitution”. On the face of it, this does not apply to Vestia: under section 1 of the Companies Act 2006, unless the context otherwise requires, “company” means a company formed and registered under the Act. However, Credit Suisse submitted that the proper response of the common law in light of these statutory provisions should be to conclude that contracts made by a legal entity outside their capacity are not invalid as against a person who deals in good faith.

This was an ambitious argument, but because of the implications of the decision in the Haugesund case I do not dismiss it out of hand. The origin of sections 39 and 40 of the Companies Act 2006 is the First Directive on Company Law (EU Directive 68/151/EEC of 9 March 1968 “on co-ordination of safeguards, which, for the protection of the interests of members and others, are required by Members States of companies … with a view to making such safeguards equivalent throughout the Community”: [1968] O J L65/7) (the “First Directive”). Article 9 requires Member States to introduce legislation abrogating the doctrine of ultra vires so as to ensure security of transactions between companies and those who deal with them. The First Directive, updated by EU Directive 2009/101/EC [2009] O J L258, specifies the types of companies of each member state to which it applies. The effect of the Haugesund case is that, if the companies of other Member States enter into a contract governed by English law, the counterparties who do business with them will not be protected under the Companies Act 2006 unless sections 39 and section 40 are interpreted to apply to them.

Credit Suisse argued that that, because Vestia’s status as a “stichting” under Dutch law is analogous to that of a company under English law, English law should similarly protect those who deal with it. Vestia recognised that it might be arguable that in order to give effect to the purpose of the First Directive section 39 should be construed so as to cover foreign legal entities covered by it: this might be justified by the so-called Marleasing principle (see Marleasing SA v La Comercial Internacional de Alimentacion SA (C-108/89), [1990] ECR I-4135), particularly since the definition of a company in section 1 of the 2006 Act is not applicable if the context otherwise requires. I do not need to decide that question because, as far as Dutch legal entities are concerned, the updated Directive covers BVs and NVs but not stichtingen.

Credit Suisse submitted that nevertheless section 39 should be applied by analogy to afford stichtingen protection or that the common law should be developed to do so, and they made four points in support of this submission:

The general rule of the English common law that legal entities are not bound by contracts outside their capacity is well-established. I do not see any proper reason that it should not apply in this case either by a generous interpretation of the statutory provisions or under the common law.

For completeness I should mention that Credit Suisse also pleaded that Vestia are “not a charity under English law (under the definition contained in s.1 of the Charities Act 2011) or analogous to a charity”. They did so because sections 39 and 40 of the Companies Act 2006 do not apply to the acts of a company that is a charity unless the counterparty (i) did not know when the contract was made (or other act done) that the company is a charity, or (ii) gave full consideration and did not know that the contract was not permitted by the charity’s constitution or (as the case might be) that the contract was beyond the powers of the directors. Vestia contended (i) that they are analogous to a charity, (ii) that Credit Suisse knew that they were when they made the disputed transactions, and (iii) that they knew that the disputed transactions were not permitted by Vestia’s constitution and were beyond the powers of the directors. In view of my other conclusions Vestia do not need to rely on these arguments. The only significance of this part of the dispute is that it emphasised artificialities and difficulties inherent in adapting the provisions of the Companies Act 2006 to foreign entities to protect their counterparties. I shall therefore state my conclusions on Vestia’s first two points succinctly: I sufficiently deal with the third point later in my judgment.

The Charities Act 2011 did not come into force until 14 March 2012, and so until after the disputed transactions, but in substance “charity” had the same meaning in the 2011 Act as under the Charities Act 2006. In order to be a charity an institution must be established for charitable purposes only, and also be subject to the control of the High Court: see section 1 of the 2011 Act. It was not argued that Vestia materially differ from a charity because they are not under the control of the English High Court, but there is an issue about whether Vestia were established for “charitable purposes” only, an expression explained by section 2(1) of the 2011 Act. In my judgment they were, because their purpose is the relief of those in need because of financial hardship by way of provision of accommodation (see section 3(1)(j) and 3(2)(e)) or their purpose may reasonably be regarded as analogous to or within the spirit of such a purpose (see section 3(1)(m)(ii)). Mr Davies pointed out that the Charities Commission regards housing associations and Registered Social Landlords as charities. Mr Howe contended otherwise in reliance on secondary activities that Vestia have, and submitted that their commercial nature is inconsistent with Vestia being a charity. I am not persuaded: the definition is directed to the entity’s purposes rather than their activities, but more importantly the secondary activities are regarded by the Minister as suitable for an admitted SHA and consistent with its status. If, as is inherent in Credit Suisse’s argument, the court is to apply the English law to foreign entities by analogy (a notion that Mr Howe did not define and maybe defies definition), it would have to have regard to and respect the foreign regime governing what activities are appropriate for, and consistent with, the purpose of the foreign entity.

Credit Suisse did not, of course, know at the time of the disputed transactions that Vestia were a charity under the 2011 Act or even under the contemporaneous 2006 Act because they were not. I conclude, however, that, had it crossed their minds to think in such terms, they would have realised that they were analogous to a charity. Mr Cathrew accepted that he knew that in the United Kingdom some Housing Associations are registered as charities and said that Credit Suisse categorised SHAs “in a similar manner”. Mr Howe pointed out that in 2007, as it appears from a Client Identification document dated 6 February 2007, Credit Suisse’s compliance and legal department gave Vestia a description or categorisation by way of “type of counterparty” as “Charity/Charitable Foundation/Non Profit Organisation/ Other Non Profit Unincorporated Business”, and that this categorisation is insufficiently specific to show that Credit Suisse were regarding Vestia as a charity or analogous to a charity. But in the same document, their categorisation for purpose of anti-money laundering is “charities”. Moreover, as I interpret an email dated 18 April 2007 sent by Ms Shaina Popat of the Credit and Legal Department to Mr Cauberg, she understood that Credit Suisse classified Vestia as a charity. (I was not persuaded by Mr Cathrew’s answers about these documents in cross-examination and re-examination.) The evidence is exiguous, but I conclude that Credit Suisse knew at the material times that Vestia’s status was analogous to that of an English charity.

As I said, Credit Suisse urged me to decide whether under Dutch law the contracts would be valid despite Vestia not having capacity to make them, even though the question does not arise for my decision in view of the Haugesund case. I shall do so, albeit somewhat reluctantly, with regard to the three ultra vires contracts.

Mr Howe relied on evidence of Mr de Groot that under Dutch law the burden of proof would lie with Vestia to prove actual or deemed awareness, but, although the question is not clearly decided, under English private international law the burden of proof is generally considered to be a matter of procedural law and as such determined by the lex fori: see Fiona Trust & Holding Corp v Privalov, [2010] EWHC 3199 (Comm) at para 94. (Article 14 of the Rome Convention has no application if only because the Convention, other than article 11, does not apply to questions involving the status or legal capacity of natural or legal persons.) However, the application of the English procedural rules would also place the burden of proving actual or deemed awareness on Vestia as the party asserting it (see paragraph 186 above). That said, I make clear that my conclusions do not depend on where the burden of proof lies.

Under article 2.7 of the DCC, which I have set out in translation at paragraph 188above, a counterparty can enforce a contract purportedly made with a legal entity without capacity unless he knew that the entity’s object was transgressed or “without personal investigation, should have been so aware”. As I understood the evidence of Professor Dorresteijn and Mr de Groot, the question is whether the counterparty had actual or what I shall label “deemed awareness” at the time that the contract was made. In their memorandum Professor Dorresteijn and Mr de Groot agreed that the test whether a counter-party has deemed awareness was stated by the Supreme Court in what they called the “Liberty” case, Handelsmaatschappij Frank Liberty NV v De Groot, 15 June 1973:

“That a possibility of reasonable doubt of the correct interpretation of objects must remain at the risk of the public limited company, so that it must still be investigated whether [the counterparty], when taking note of the objects clause, could not reasonably have come to another conclusion than that the contract was ultra vires with regard to [the entity’s] objects”

Professor Dorresteijn explained the relevant Dutch law in more detail, and I accept his evidence about this. Importantly he explained that, if information is obtained by an employee involved with the transaction, that knowledge is considered to be that of the legal entity itself. Moreover (to quote from Professor Dorresteijn’s first report), “In Dutch law, knowledge once obtained by a legal person will be regarded as obtained by that legal person irrespective of the fact that individual employees have since forgotten it”. The importance of this is that Credit Suisse, as an institution, were aware of the terms of Vestia’s articles of association (and other material relevant to their capacity including the Housing Act and the BBSH). They also had received the advice of A&O (Amsterdam), which is clear and which there is no reason to think Credit Suisse did not understand or thought did not apply to Vestia. In any case Mr Tulkens’ email of 8 January 2007 shows that Credit Suisse appreciated that, in order to be aware whether transactions were within a SHA’s capacity, they should ascertain the nature of the business that the SHA was doing with them. As I understand Professor Dorresteijn’s evidence, it is no answer for Credit Suisse to say that this knowledge was not shared with those who dealt with the SHA, specifically that Mr Dupont was unaware of the terms of Vestia’s objects.

Professor Dorresteijn and Mr de Groot also agreed that in some legal literature it is suggested that the counterparty must investigate where circumstances are “suspect” (“verdachte omstandigheden”) or bad risks (“kwade kansen”) are involved. Professor Dorresteijn’s evidence was that if a counterparty “has reasons to investigate whether the transaction is actually within the object and does not perform investigations it cannot object to the avoidance of the transaction by the legal person on the ground that it was not aware thereof”. This might seem contrary to the words “without personal investigation” in article 2.7, but Professor Dorresteijn did not consider that they are applied so literally once a counterparty has reasons to investigate. His view is, as I accept, supported by authority that he cited: a decision of the Amsterdam Court of Appeal in Credit Lyonnais Bank Nederland NV v Maatschappij voor Nederlandsch Grondbezit BV, 27 November 1986. The Court rejected an argument that the bank could simply rely on what its director and sole shareholder knew about whether a transaction was within the counterparty’s objects, and (to quote the agreed translation of the edited judgment at paragraph 4.9) “In the given situation, by not carrying out a further investigation into the concrete relationship of the intended mortgage granting and the [company’s] objects, the [bank] took the risk that there would indeed be an ultra vires act and it cannot reasonably be deemed unaware”. I accept Professor Dorresteijn’s evidence that this represents Dutch law.

Because the nature of the investment itself does not determine whether or not it was a hedge, a bank in the position of Credit Suisse cannot be certain whether any particular transaction is a hedge without knowing the counterparty’s risks and exposures. As Mr Dulude put it, “unless [Credit Suisse] was specifically told about the interest rate risk position of Vestia at the time of execution of the Disputed Transactions, it would have been impossible for [Credit Suisse] to exactly know whether or not the Disputed Transactions were increasing or decreasing risk or could be deemed a hedge unless Vestia decided to disclose certain risks they were attempting to hedge” (although he went on to say that a reasonably competent banker would have formed a view about what exposure the client was trying to hedge so as to consider whether a proposal was appropriate). Credit Suisse had no such exact knowledge, and therefore were not actually aware that in making the contracts Vestia were transgressing their objects. The real issue is about deemed awareness, and here, as I see it, the central question is whether, when they entered into the ultra vires contracts, Credit Suisse, and specifically Mr Dupont, should have been aware that they did not have a hedging effect or were not part of a hedging programme in the sense that I have described. In answering this, Dutch courts would, as Professor Dorresteijn explained, consider “all relevant circumstances” and the circumstances might have required Credit Suisse to have “investigate[d] whether the transaction is within the object”.

Mr Dupont’s evidence was this: that he was “broadly aware” of the legal and regulatory regime applicable to SHAs, but not aware of the “specific legal details” of the Housing Act and the BBSH. He relied on Credit Suisse’s “legal team” to advise him on whether there were “any legal issues concerning transactions with SHAs” and “From [his] general familiarity with SHAs’ operations [he] had no awareness … of any specific prohibitions on SHAs entering into any type of derivative”. Thus, he did not turn his mind to whether his proposals to Vestia and the contracts that he concluded were within Vestia’s objects, or went to reduce Vestia’s exposure to risk or fitted into a programme that did so. I add for completeness that Mr Curran said that he had no recollection of specifically giving thought to whether Vestia had legal capacity to enter into the ultra vires contracts, and I conclude that he did not do so.

Had Mr Dupont thought about it, he had every reason to suppose that the ultra vires contracts would not hedge exposures that Vestia had, or would have, and that they were not part of a programme to do so. The genesis of the contract comprising transactions 3, 4 and 5 was Mr Dupont’s proposals about how Vestia could “make a gain” (or “obtain an advantage”) from the “high volatility” in the market: see paragraph 95above. I recognise that when presenting what became the transactions 7 and 8 contract Mr Dupont referred to adjusting the proposal to fit Vestia’s hedging portfolio (paragraph 116above), the last minute change from a receiver swaption to a payer swaption was a clear indication that Mr de Vries’ purpose was to play the market rather than to hedge. Transaction 9 was presented as an investment designed to take advantage of market conditions.

I conclude that, given Credit Suisse’s knowledge of Vestia’s objects and the information that Mr Dupont had about the ultra vires contracts, Credit Suisse should have been aware, for the purposes of article 2.7, that the contracts transgressed Vestia’s objects. Credit Suisse knew enough to require them to consider whether or not they did. Mr Howe emphasised that article 2.7 makes clear that the counterparty is not expected to carry out investigations: the question is whether Credit Suisse should have been aware that Vestia’s object was transgressed “without personal investigation”. But as I see it, my conclusion is consistent with this: I cannot improve on how Mr Davies put it in his oral submissions: “on what they knew, the conclusion was there to be drawn that the transactions were in breach of the object … it doesn’t matter whether or not they actually joined the dots; the point is that they had all the relevant material”.

Credit Suisse plead a range of circumstances that, they say, refute this conclusion. I do not, given that this issue does not arise unless the Haugesund case is overruled, consider them all, but I comment on some of them:

If the question arose, I would conclude that under Dutch law Credit Suisse cannot enforce the ultra vires contracts.

Vestia did not argue that, if they had capacity to enter into the disputed transactions, they were nevertheless made by Mr de Vries or Mr Staal without their authority. Their argument about authority was, as Mr Davies made clear during closing submissions, only that neither Mr de Vries nor Mr Staal nor anyone else had authority to make a contract for Vestia if it was outside Vestia’s capacity. (Vestia also pleaded that the disputed transactions would have been made without authority if they were inconsistent with articles 21 or 22 of the BBSH. But in his closing submissions Mr Davies explained that that plea was designed to meet a case that Vestia’s capacity was not governed by the secondary acts doctrine but by reference instead to articles 21 and 22. In view of how the argument about capacity had developed during the trial and the evidence about the relevance of articles 21 and 22 to it, he no longer relied upon that part of Vestia’s pleaded case.)

The issue about authority therefore arises only if for some reason Vestia would otherwise be bound by a contract that they did not have capacity to make: for example, if (contrary to the authority of the Haugesund case) the legal consequences of incapacity are governed by the law of the entity’s incorporation and Credit Suisse can take advantage of article 2.7 of the DCC, or if (as Credit Suisse contended) Vestia are covered by section 39 of the Companies Act 2006 and Credit Suisse are protected by it. Therefore the issues about authority do not arise if the conclusions that I have reached are correct. I should, however, consider them briefly because Credit Suisse might wish to challenge the Haugesund decision in a superior court.

It is generally accepted, and I understand it is common ground between Credit Suisse and Vestia, that under the rules of English private international law an agent has authority to enter into a contract (or to do another act) if he would be considered to have actual authority by the law governing his relationship with his principal or he would be considered to have apparent authority by the law governing the putative contract (or other relationship) with the third party. If the agent does not have actual or apparent authority in accordance with these principles, the consequences are governed by the law of the putative contract, here by English law. In this case, therefore, the consequences if the disputed transactions were made without Vestia’s authority would be that they are void. I have rejected Credit Suisse’s argument that they are protected from the consequences of the transactions being outside Vestia’s authority by the Companies Act 2006 or by analogous principles of common law. For similar reasons I reject the suggestion that they would be protected from the consequences of them being made without Vestia’s authority, whether directly under the Companies Act 2006 properly interpreted or by analogous principles developed by the common law.

Credit Suisse’s contention is that the disputed transactions were made by Mr de Vries and confirmed by Mr Staal, whose Confirmations (if Mr de Vries lacked the requisite authority) would have constituted ratification of them. The question, therefore, is whether, assuming the contracts comprising the disputed transactions to be outside Vestia’s authority, either Mr de Vries or Mr Staal had either apparent authority under English law or authority under a principle of Dutch law that would be characterised (or classified) by English private international law as one that determines an agent’s actual authority.

Under English common law no agent of a legal entity has authority to act outside the capacity of the entity. This was stated in Pickering v Stephenson, (1872) LR 14 Eq 322, 340 by Wigram V-C, who saw this as a principle not only of English domestic law but a broader tenet of jurisprudence:

“According to the principle in question, the special powers, given either to the directors or to a majority, by the statutes or other constituent documents of the association, however absolute in terms, are always to be construed as subject to a paramount and inherent restriction that they are to be exercised in subjection to the special purposes of the original bond of association. This is not a mere canon of English municipal law, but a great and broad principle which must be taken, in absence of proof to the contrary, as part of any given system of jurisprudence … But though the rights which I have to deal with are rights regulated by Turkish law, the general principle assumed to be common to all systems must be applied by me in the way in which I find it to have been applied by the English Courts. The case would be otherwise if it were shewn that the course and habit of Turkish Courts has been to apply it differently.”

It follows, in my judgment, that, at least in the circumstances of this case, Vestia did not confer apparent authority on Mr de Vries or Mr Staal to enter into the ultra vires contracts or to ratify them. This would have required that Vestia had represented (or held out) the putative agent as having relevant authority (whether by an express representation or by appointment to a position commonly carrying with it such authority or by acceptance through a course of dealing or otherwise), and that this representation had been made by someone with authority to make it on behalf of Vestia (either because he himself had a delegable authority so to act or because he was authorised to make representations about the agent’s authority). No one was authorised by Vestia to represent that Mr de Vries or Mr Staal had authority to make or to ratify contracts that were outside Vestia’s objects.

It is difficult to identify any principle of Dutch law that would be characterised by the rules of English private international law as giving an agent actual authority to contract with a third party on behalf of a principal. The question whether an agent’s act is binding between his principal and a third party is governed by article 2.7 of the DCC: it is about whether an agent has so-called “representative authority”. Dutch law does not distinguish between what English law would consider to be actual and apparent authority, and is concerned only with whether an agent’s act will bind the principal. (It is an approach that apparently some English lawyers might welcome: see Bowstead & Reynolds on Agency (20^th Ed, 2014) paragraph 12-017.) The Dutch law of representative authority is, to my mind, more naturally classified as corresponding to the English law of apparent authority than to the English law of actual authority. I am not persuaded that Dutch law has any relevant principle that corresponds to the English law of actual authority, whereby an agent is empowered to affect his principal’s relationship with third parties. If, however, Dutch law has any relevant principle that would be characterised by English private law as one of actual authority, it is in article 2.9 of the DCC, which provides as follows:

“1.

Each officer or director shall be responsible towards the legal person for the proper performance of his duties …

2.

Each director shall be responsible for the general course of affairs. He shall be wholly liable for improper management, unless no serious reproach can be made against him, having regard to the duties attributed to others, and he was not negligent in acting to prevent the consequences of improper management.”

Professor Dorresteijn gave this evidence about contracts that are outside the capacity of a legal entity:

“… a director violates his duties by entering into an agreement with a third party on behalf of the foundation if (i) he acts in contravention of the articles or without being backed by a board resolution where that is required and/or in violation of his duties under his employment or services contract and (ii) the agreement is detrimental to the interest of the foundation”.

I accept that evidence and infer that Mr de Vries and Mr Staal acted in breach of their duties to Vestia if and in so far as they entered into or ratified contracts that were outside Vestia’s capacity.

Mr Howe advanced three arguments against this. First, he appeared in his opening submissions to suggest that in view of article 2.9(2) of the DCC, Vestia would have to show that “serious reproach” could be made against Mr de Vries and Mr Staal in order to show that they had acted in breach of duty. This argument was not, I think, pursued in Credit Suisse’s final submissions, but I would, if necessary, conclude that serious reproach could be made against each in these circumstances. In any case this question does not go to whether there was breach of duty, but to the consequences if there was. This is the implication of what Professor Dorresteijn and Mr de Groot stated in their agreed memorandum:

“Vestia’s Financial Statute is an internally binding regulation. Violation can lead to liability of a director and/or employee towards the foundation/Vestia and to avoidance of decisions taken …”

If that is the position when there is a failure to observe the Financial Regulations, surely a fortiori it is also the position if the articles are transgressed.

Secondly, Mr Howe relied upon the evidence of Mr de Groot that, “Incompetence of a director as a result of transgression of the object clause is very rare”. This observation was not directed to any question of actual authority or a Dutch doctrine corresponding thereto. It was about the Dutch concept of representative authority, which, as I have said, corresponds more closely to the English doctrine of apparent authority.

Thirdly, Mr Howe argued that Professor Dorresteijn’s evidence makes clear that a director violates his duty by entering into an ultra vires contract on behalf of a stichting only if it is detrimental to the interests of the stichting, and that the disputed transactions are not so to be regarded. I do not so understand the evidence of Professor Dorresteijn: I did not understand him to say that two separate conditions need to be satisfied in order for a director to violate his duty. As I understand his evidence, this was simply an observation that an ultra vires contract will be detrimental to the interests of the stichting.

I therefore reject these three submissions of Mr Howe. In my judgment, if the disputed contracts were outside the capacity of Vestia, under English law, applying its private international law principles, the contracts would be considered to be void on the basis they were made without authority.

I have concluded that the ultra vires contracts are invalid in that they were outside their objects and because neither Mr de Vries nor Mr Staal had authority to make them. However, Credit Suisse have further arguments based on the terms of the Master Agreement and the Management Certificate. They can be grouped under three heads: estoppel, warranty and misrepresentation. It is convenient first to set out the provisions that are relevant for all three lines of argument.

Section 3 of the Master Agreement provides that:

“Each party makes the representations contained in [inter alia, section 3(a), 3(d) and 3(f)] (which representations will be deemed to be repeated by each party on each date when a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement). If any “Additional Representation” is specified in the Schedule or any Confirmation as applying, the party or parties specified for such Additional Representation will make and, if applicable, be deemed to repeat such Additional Representation at the time or times specified for such Additional Representation.”

Section 3(f) contained “Payee Tax Representations”, on which Credit Suisse do not rely.

Credit Suisse rely on these provisions in section 3(a):

“…

“(ii)

Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement … and has taken all necessary action to authorise such execution, delivery and performance;

“(iii)

No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;

“(iv)

Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement … have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and

“(v)

Obligations Binding. Its obligations under this Agreement … constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms …”.

Section 3(d) provided:

“All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect”.

The Schedule included that Vestia were to deliver “Evidence reasonably satisfactory to the other party as to the names, true signatures and authority of the officers or officials signing this Agreement or any Confirmation on its behalf”, and identified this evidence as covered by section 3(d). There is no dispute that the Management Certificate, which was signed by Mr Staal and delivered to Credit Suisse, was such evidence and is covered by section 3(d). It is necessary to set it out in full:

“The undersigned, in their capacity as members of the managing board (bestuur) of [Vestia], a foundation (stichting) organised under the laws of the Netherlands, are authorised by Vestia to deliver this certificate and certify:

1.

that Vestia has all requisite power and authority to enter into and perform any transaction which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, commodity transaction, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, credit derivative transaction, equity derivative transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, interest rate swap transaction, inflation swap transaction, or a credit default swap and any similar transaction or a combination of any of these transactions, including any option with respect to any of these transactions under the ISDA Master Agreement, entered into or to be entered into by Vestia with [Credit Suisse] (‘Derivatives Transaction’);

2.

that the entry into by Vestia of any Derivatives Transaction and the performance of its obligations thereunder pursuant to the ISDA Master Agreement, the Schedule and the Credit Support Annex thereto comply in all respects with and does [sic] not result in a violation of:

- Vestia’s articles of association, any applicable internal regulation, including but not limited to any applicable investment guidelines;

- any applicable law, rule, regulation, interpretation, guideline, procedure and policy of applicable governmental and regulatory authorities affecting Vestia;

3.

that the management board of Vestia has carefully considered the proposed Derivatives Transaction, taking into account all relevant facts and circumstances and deems the entering into of such Derivatives Transaction pursuant to the ISDA Master Agreement, the Schedule and Credit Support Annex thereto in furtherance of Vestia’s interest and for its corporate benefit and conducive to the attainment of Vestia’s objects, as stated in its articles of association, and Vestia’s investment objects as stated in its applicable investment guidelines;

4.

that Vestia has taken all necessary corporate action to authorise its entry into and the performance of its obligations under the Derivatives Transaction pursuant to the ISDA Master Agreement, the Schedule and the Credit Support Annex thereto;

5.

that [Credit Suisse] may rely on this Management Certificate; and

6.

the following signatures [i.e. that of Mr Staal] are the true signatures of the persons who have been authorised to sign the relevant documents in relation to the Derivatives Transaction on behalf of Vestia and to give notices and communications, under or in connection with such documents on behalf of Vestia: …”.

The Schedule to the Master Agreement also provided for “Additional Representations” as contemplated in section 3, including these:

“[Vestia] hereby represents and warrants to [Credit Suisse] (which representations will be deemed to be repeated by [Vestia] on each date on which a Transactions [sic] is entered into that:

(i)

[Vestia’s] entry into and performance of its obligations under this Agreement and each Transaction hereunder is and will be in compliance with its articles of association (statuten), its financial rules (financieel statuut) and any other laws or regulations applicable to [Vestia] from time to time including, but not limited to, the [BBSH] (as the same may be amended, supplemented or replaced); and

(ii)

[Vestia] is entering into each Transaction purely for the purpose of hedging its exposures and not for the purpose of speculation”.

The expression “Transaction” has the meaning given to it in the preamble to the Master Agreement that I have set out at paragraph 83above. I shall call these two Additional Representations the “compliance” provision and the “hedging” provision.

I observe in passing, although it is not strictly relevant to what I have to decide, that the Additional Representations were the subject of some consideration during the negotiations leading to the Master Agreement. In their comments on the first draft of the Schedule to the Master Agreement (in an email dated 27 August 2010) A&O Amsterdam proposed that these representations be omitted (together with other proposed representations and warranties, including that Vestia would comply with all internal policies, including, but not limited to, their Financial Regulations). However, when Credit Suisse repeated their request that these two provisions be included, stating that they “are market standard and should not be contentious”, Vestia agreed to them (as A&O Amsterdam advised Credit Suisse in an email of 14 September 2010).

Credit Suisse rely on the provisions of the Master Agreement itself. It is not disputed that Vestia had capacity to make the Master Agreement and it is binding on Vestia. It will be seen that section 3 provided that the representations in the Master Agreement are deemed repeated on each date that a Transaction is entered into, but Credit Suisse do not rely upon such deemed repetitions. Hobhouse J said in Westdeutsche Landesbank Girozentrale v Islington LBC, [1994] 4 All ER 890, 905b, “The contract … included the standard warranty of capacity ….; it is recognised by the plaintiffs in this action that it was ultra vires the council to give this warranty just as it was ultra vires the council to enter into the contract as a whole”. Credit Suisse also recognise this “bootstraps” argument, and do not put their case on the basis that any ultra vires contracts include (or are deemed to include) provisions about Vestia’s capacity or the authority of Mr de Vries and Mr Staal to make them. After all, the Master Agreement provided that the representations in section 3(a) and section 3(d) were repeated when Vestia entered into a “Transaction”, but Vestia did not “enter into” the ultra vires contracts, and so the representations were not then repeated (or deemed to be repeated). But Credit Suisse submit that this does not affect their argument based on the other provisions of the Master Agreement (whether in the Master Agreement itself or in the Management Certificate and incorporated through section 3(d)), and in support of this they cite Firth, Derivatives Law and Practice (loose-leaf, 2013) at paragraph 11.038:

“… if the invalidity merely relates to the particular transaction entered into under the [Master] Agreement, there seems to be no reason why the representations in the Agreement should not be enforceable even if the transaction is not”.

Mr Howe submitted that, on the proper interpretation of the Master Agreement, the provisions in section 3(a), and in section 3(d) and the Management Certificate, and the provisions in the Additional Representations all constituted warranties given by Vestia. He cited Chitty on Contracts (31^st Ed, 2012) vol 1 at paragraph 12-003 where the editors identify considerations that are taken into account in deciding whether a statement in a contract is a mere representation or a contractual term. However, as the editors observe, citing Heilbut, Symons & Co v Buckleton, [1913] AC 30, 50 per Lord Moulton, the true test is whether there is “evidence of an intention by one or both of the parties that there should be contractual liability in respect of the accuracy of the statement”, such intention, of course, to be ascertained objectively. Here, the parties’ intention is, in my judgment, clear simply from the words of the Master Agreement.

The provisions in section 3(a) of the Master Agreement are about the position when the Master Agreement was made: they are expressed in the present tense, and the parties’ intention that the representations other than in those section 3(g) should be understood to describe the position only when they were made is reflected in the specific treatment of section 3(g). This is why the representations were deemed to be repeated at the dates when transactions were entered into. As I interpret the Master Agreement, when they agreed to the provisions in section 3(a), Vestia (and Credit Suisse) were making representations about their power to enter into and act in relation to the Master Agreement, that their doing so created no “violation or conflict”, and that they had the requisite consents to do so and about the obligations under it. Those representations were not about any future transactions (including the disputed transactions or ultra vires contracts), and the parties were not saying anything about what their capacity would be in the future.

If this is so, it seems to be clear that the statements in section 3(a) are intended to be mere representations and not contractual undertakings. Of course contracting parties can give undertakings about a present (or past) state of affairs, but here they did not do so. Section 3 called the statements “representations” and that expression “representation” has a well-established meaning in English legal terminology - representations are statements of fact rather than warranties, undertakings or promises: see Cassa di Risparmio della Republica di San Marino v Barclays Bank Ltd, [2011] EWHC 484 (Comm) at paragraph 215 per Hamblen J. Given the experience of Credit Suisse and that Vestia had legal advice, they are to be taken to have understood the connotations of the word. Most decisive perhaps, the Master Agreement itself distinctly distinguished between representations and warranties: see the Additional Representations that I have set out in paragraph 291above.

I take a similar view about the statements in the Management Certificate, which were said in section 3(d) to be “true, accurate and complete in every material respect”. I accept that the parties’ intentions here are perhaps less clear than in section 3(a) because the Management Certificate is directed to transactions that it is anticipated will be entered into in the future, including Vestia’s power and authority to enter into and perform derivatives transactions and whether their articles of association and other internal and external requirements allowed them to do so. However, section 3(d) is about the position “as of the date of the information”. I accept Mr Davies’ submission that the parties intended that the statements made through the Management Certificate should take effect when they were repeated (or deemed to be repeated) at the date that transactions were entered into at a later date. This view is corroborated by paragraph 3 of the Management Certificate: plainly Vestia’s Board would not have already considered all prospective derivative transactions when the Master Agreement was made. The intention, I infer, was that Vestia should make the statement when the representation was repeated in the context of the particular transaction being entered into. As Mr Davies put it, “For practical purposes the effect of the statements in the [Management Certificate], though it is oddly structured, is therefore the same as the other representations and so far as relevant the statements are only made in relation to a valid transaction”.

I therefore conclude that the parties had it in mind that, when they entered into transactions, Vestia should make (or be deemed to make) the statements in the Management Certificate: they would then be statements of fact about the present (paragraphs 1 and 2 of the Management Certificate) or the past (paragraphs 3 and 4). If this is so, I consider for the same reasons that I have explained in relation to section 3(a), the statements in section 3(d) and through it the Management Certificate are also mere representations and not contractual undertakings.

Credit Suisse contended that the parties cannot have intended this interpretation of section 3(a) and section 3(d) because to take their provisions to be mere representations eviscerates section 3 and undermines the protection that it is designed to provide. I do not agree: the meaning is clear from the wording of the Master Agreement, and on Vestia’s interpretation they still provide a degree of protection to the recipients of the representations and, to my mind, made good business sense.

The corollary of this conclusion is that the position of “Additional Representations” in the Schedule to the Master Agreement is different. I observe that section 3 is headed “Representations”, but that is to be disregarded because section 9(g) states that headings are not to be taken into consideration when construing the Master Agreement. I recognise that they were incorporated into the Master Agreement in section 3 as “Additional Representations”, but I cannot accept that this shows that the parties intended them to take effect only as representations. They unambiguously refer to Vestia warranting to Credit Suisse the matters therein stated, and to my mind the parties clearly intended them to take effect as contractual undertakings as well as representations.

Credit Suisse’s original pleading asserted both estoppel by representation and contractual estoppel and relied in support of their estoppel arguments on a plethora of assertions. During the trial these arguments were narrowed considerably, so that in the end:

The so-called principle of contractual estoppel was explained as follows by Moore-Bick LJ in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd, [2006] EWCA Civ 386 at paragraph 56:

“There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not. For example, it may be desirable to settle a disagreement as to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance. Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerns those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel: …”.

This has been widely accepted as an authoritative statement of the principle of law that has in recent years been dubbed “contractual estoppel”, and it was endorsed by Aikens LJ in Springwell Navigation Corp v J P Morgan Chase Bank, [2010] EWCA Civ 1221 at paragraph 144. It is irrelevant that one party or both (or all) parties knew or could reasonably have discovered that the state of affairs was not as agreed. So too are any question about whether either (or any) party relied on what was agreed and any question of detriment.

It is important to distinguish the applicability of this principle to (i) representations made by Vestia in section 3(a), section 3(d) (and the Management Certificate) and the Additional Representations, and (ii) the warranties given by Vestia in the Additional Representations. Mere representations do not, as I see it, engage the principle of contractual estoppel and in any case, as I have explained, I do not consider that the representations in the Master Agreement itself are to be interpreted as applicable to the time when the ultra vires contracts or other transactions were made or purportedly made.

But Vestia have another answer to Credit Suisse’s argument that the representations give rise to a contractual estoppel: that Vestia cannot by estoppel or contract extend their capacity so as to be able to do what would otherwise be outside their objects. At first instance in the Haugesund case, [2009] EWHC 2227 (Comm), Tomlinson J rejected an argument that the counterparty bank could rely on the representations in section 3(a) of the ISDA Master Agreement against the claimant municipality. In that case the argument was put forward on the basis of estoppel by representation, but it would have been no more successful had it been cast as one of contractual estoppel. Tomlinson J referred to the position of public or statutory bodies, citing the judgment of Harman J in Rhyl UDC v Rhyl Amusements Ltd, [1959] 1 WLR 465, 474-475, “where he pointed out that arguments of this sort which might avail against ‘private people’ cannot prevail as an answer to a claim that something has been done by a statutory body without it having capacity so to do” (loc cit at paragraph 172). Mr Howe accepted that this is so in the case of local authorities or other public bodies, but submitted that Vestia are in a different position because, though they operate in the field of social housing, they are a private entity.

Professor Dorresteijn’s evidence was that Vestia and other SHAs “are not part of the governmental organisations”, and I accept this. But I do not consider that this assists Credit Suisse, or that Vestia could have extended their contractual capacity by representing (by contract or otherwise) that they have powers which they do not have or that it is within their powers to make a contract when it is not. A contract that is ultra vires the powers of a company is void, and it cannot be validated: see Chitty on Contracts (31^st Ed, 2012) vol 1 at paragraphs 9-020 and 9-024, citing the judgment of Russell J in York Corp v Henry Leetham & Sons, [1924] 1 Ch 557, 573: “An ultra vires agreement cannot become intra vires by means of estoppel, lapse of time, ratification, acquiescence, or delay”. Although this was said in the context of the capacity of a local authority, the editors of Chitty clearly understand it to be a wider statement of principle, and I agree. The same is said by the editors of Spencer Bower, The Law relating to Estoppel by Representation, (4^th Ed, 2004) at paragraph VII.6.1: “nor [can] a company become entitled by estoppel to exceed its statutory powers or those given to it by its memorandum of association”. The position relating to companies incorporated under the Companies Acts is illustrated by Ashbury Railway Carriage and Iron Co v Riche, (1875) LR 7 HL 653 and Great North-West Central Ry v Chamlebois, [1899] AC 114. In my judgment the representations in the Master Agreement and the Management Certificate do not enable Credit Suisse to argue that Vestia are estopped from disputing that the ultra vires contracts were within their capacity or from disputing the authority of Mr de Vries and Mr Staal to make the ultra vires contracts.

What is the position with regard to the warranties in the Additional Representations? Here three questions must be considered:

In his formulation of the doctrine of contractual estoppel in Peekay Moore-Bick LJ said that parties are able to agree upon “a state of affairs [that] should form the basis for the transaction”. In most of the subsequent cases that have considered the doctrine, the parties had agreed about a present or past state of affairs and made their contract on the deemed basis that that state of affairs obtained or had obtained. But I can see no reason of authority, principle or policy that the doctrine should be confined to agreements of that kind, or that the law should adopt a different approach where parties have made an agreement about a state of affairs in the future, whether or not the label contractual estoppel should be attached in those circumstances. Indeed, all three considerations seem to me to indicate that the doctrine should not be so confined.

As for authority, I know of no case in which the point has been expressly considered in these terms, but in two first instance decisions in this court it was apparently assumed that an agreement about the future engaged the doctrine. In Titan Steel Wheels v RBS, [2010] EWHC 211 (Comm) David Steel J applied the doctrine in a case in which one of the relevant terms was an agreement about the future: Titan were to seek independent advice if required: see paragraph 82 of the judgment. In Bank Leumi (UK) Plc v Wachner, [2011] 178 (Comm) Flaux J applied the doctrine to a term, “You agree that you will rely on your own judgment for all trading decisions": at paragraphs 183, 184.

As for principle, I could understand that the doctrine might be confined to statements about a past or present statement of affairs if it were really about a form of estoppel, but to my mind, while the term “contractual estoppel” has been adopted as a convenient label, it is no more than that: a defining characteristic of estoppels is detriment in some form or other, and, as I have said, contractual estoppel does not require detriment. This is the view of Wilken and Ghaly, The Law of Waiver, Variation and Estoppel (3^rd Ed, 2012) at paragraph 13.22, whose analysis I would adopt. The authors explain (at paragraph 13.24) the true nature of the doctrine:

“Peekay, if it cannot be justified by recourse to an estoppel, has to be justified by other means. The most obvious means is contractual. Since the parties have agreed X to be the case, then the party which denies that X is in fact the case is in breach of contract. The Courts will not permit a party to benefit from its own wrong – including its own breach of contract. The Peekay contractual estoppel would be a reflection of that principle”

As for policy, Wilken and Ghaly cite in support of their analysis in paragraph 13.24 Alghussein Establishment v Eton College, [1988] 1 WLR 587, in which (at p.591D/E) Lord Jauncey traced a long line of authority from the decision of Lord Ellenborough CJ in Rede v Farr, (1817) 6 M & S 121, 124-125 that “a contract party will not in normal circumstances be entitled to take advantage of his own breach as against the other party”. It seems to me that the separate (but perhaps related) policy against circuity of action (see Farstad Supply AS v Enviroco Ltd, [2010] UKSC 18) also applies.

The next question is this: given that, as I have concluded, the Additional Representations comprised warranties by Vestia as well as representations, what, on the proper interpretation of the Additional Representations, did Vestia warrant, and in particular did they give warranties that covered the ultra vires contracts.

As I understand it, Vestia accept that on the proper interpretation of the Master Agreement they entered into warranties, and so they accept that, by the compliance provision, Vestia warranted when they made the Master Agreement that it was within their objects (and more generally in compliance with their articles of association and Financial Regulations and other applicable laws and regulations, including the BBSH) for them to enter into it and to perform their obligations under it and that this would remain the position. However, they say that the warranties in the Master Agreement itself (in contradistinction to any deemed repetition thereof) are concerned only with entry into the Master Agreement itself and performance of obligations under it, and that the Master Agreement did not itself include any warranty about later transactions or Vestia’s capacity to enter into them. This interpretation might be seen as giving the Additional Representations an effect that is more harmonious with the other representations, including those in section 3(a) and section 3(d): in the case of the Additional Representations too, the statements in the Master Agreement itself would similarly impact only upon the Master Agreement, and they would impact on subsequent transactions only through repetition or deemed repetition.

In the case of the hedging provision there might be some further support for this interpretation in its precise wording: it is expressed in terms of transactions into which Vestia “is entering”, and this might suggest that it is triggered by the deemed repetitions of the “representation” when Vestia entered into transactions. I return to the hedging provision at paragraph 316below: its interpretation is not crucial to my ultimate decision. However, this argument and the wording of the hedging provision underline the different wording of the compliance provision, which is about Vestia acting in compliance both at the time of the “representation” and thereafter with (inter alia) their articles of association (“is and will be in compliance”). As I see it, on its face the wording of the compliance provision in the Master Agreement itself (in contradistinction to its deemed repetition when Vestia entered into transactions) connotes that Vestia warranted in the Master Agreement itself that they would be acting in compliance with their articles of association (and so within their capacity) when entering into transactions covered by it.

This leads to another question about the interpretation of the compliance provision. Does the expression “Transaction” cover the ultra vires contracts, or does it only cover transactions or contracts validly concluded by Vestia and Credit Suisse? The answer to this is not to be found in the “bootstraps” argument that Hobhouse J explained in the Westdeutsche Landesbank case (see paragraph 293above): the question is about the interpretation of the undoubtedly valid Master Agreement.

The Additional Representations are not well drafted, and the principle of interpretation contra proferentem would operate against Credit Suisse: they are (in the language of Staughton LJ in Youell v Bland Welch & Co Ltd, [1992] Lloyd's LR 127,134) both the proferens in contrahendo and the proferens coram iudice. Nevertheless, I conclude that the parties must be understood to have intended that by the Additional Representations Vestia should warrant that any future transactions that their officers (including Mr de Vries and Mr Staal) purported to make under the Master Agreement would be in accordance with their articles of association. The obvious purpose of the Additional Representations and the mischief that, to my mind, they were clearly designed to meet were that future transactions (or purported transactions) should not be vitiated because of limitations in Vestia’s articles of association or Financial Regulations or other applicable laws or regulations. The parties agreed that Credit Suisse should be protected from this risk. After all, the contractual context was that Vestia had provided their articles of association to Credit Suisse, and both parties are to be taken to have entered into the Master Agreement in the knowledge of the limitations on Vestia’s capacity with regard to transactions of the kind that might be made under the Master Agreement. (Indeed, it is apparent from the advice of A&O Amsterdam and Mr Tulkens’ email that Credit Suisse were so aware.) The fact that the parties included a specific hedging provision leaves no doubt that this concern was the target of the Additional Representations. I cannot accept that the parties contemplated that they would apply only where breach of the compliance provision in relation to a proposed transaction did not make it invalid: where there was nevertheless a valid contract. That, it seems to me, would be to attribute an absurd intention to the parties.

I come back to the hedging provision, although it suffices for Credit Suisse’s purposes that I uphold their interpretation of the compliance provision. However, the compliance provision is not to be interpreted in isolation, and the proper approach is to seek a harmonious interpretation of the Master Agreement as a whole: see Chitty on Contracts, (loc cit) vol 1 at paragraph 12-63. If the hedging provision is given the interpretation contemplated in paragraph 313above, then the compliance provision would cover ultra vires contracts, but the hedging provision would not do so, even if the reason for a contract being ultra vires is that it was a speculation (or made for the purpose of speculation). This leads me to conclude that the parties did not intend the hedging provision to take effect if and when Vestia entered into transactions and that they intended that Vestia should warrant in the Master Agreement itself that all transactions under it should be for the purpose of hedging. The alternative interpretation places more weight on the words “is entering” than they can bear.

But my conclusion about the construction and effect of the compliance provision does not depend on my views about the hedging provision. If I am wrong in my interpretation, then I would still conclude that the warranty in the compliance provision in the Master Agreement covered ultra vires transactions made under it although the hedging provision does not.

I add that, in reaching this conclusion, I recognise (i) that the compliance provision is not concerned only with Vestia acting within their articles of association but compliance with other requirements, the breach of which might well not invalidate contracts into which they entered; and (ii) that the hedging provision is expressed in terms of Vestia’s purpose in entering a transaction, which does not reflect an objective test of the nature of a contract that, as I have concluded, is the approach of Dutch law. These considerations do not alter my conclusion about how the Additional Representations are to be interpreted to reflect the parties’ intentions.

Would the Additional Representations so interpreted be inconsistent with a policy or principle of law that an entity cannot expand its own capacity by estoppel or contract? In my judgment they would not be. I readily accept that an entity cannot achieve what it has no power to do simply by stating or promising that it has the power, and that underlying the doctrine of ultra vires is a policy of protecting the public: see Hazell v Hammersmith and Fulham LBC, [1992] 2 AC 1, 36F/G per Lord Templeman. But there seems to me no reason that a legal entity should not in a valid contract undertake that the contract will not be used as a vehicle for purported transactions that are invalid because they are outside their capacity. Credit Suisse are not making a claim under the ultra vires contracts and in this part of their claim are not asserting that they are valid. Their argument is that they are entitled to enforce the Master Agreement as if the ultra vires contracts were valid. Having reached this conclusion I need not, and do not, comment upon Credit Suisse’s alternative argument that it should not be assumed that considerations of English public policy apply to a Dutch entity and that it should not be supposed that Dutch law would not protect Vestia from the consequences of the Master Agreement being enforced according to its terms.

I therefore conclude that, because those acting for Vestia purported to enter into the ultra vires contracts under the Master Agreement and those contracts were not in compliance with their articles of association, Vestia were in breach of the compliance provision of the Additional Representations. Moreover the ultra vires contracts were outside Vestia’s capacity as a natural (but not inherent) result of them being made for the purpose of speculation and not for the purpose of hedging: this led to them in fact not being hedging contracts. Accordingly the ultra vires contracts were invalid because Vestia were in breach of the hedging provision of the Additional Representations. I conclude that therefore it is not open to Vestia to dispute their liability to Credit Suisse under the Master Agreement on the grounds that the ultra vires contracts were outside their capacity and so invalid.

What of the argument that, if transactions were outside Vestia’s objects, Mr de Vries and Mr Staal had no authority to make them? The Additional Representations are not directly concerned with the authority of those who act for Vestia, and would not assist Credit Suisse if Mr de Vries or Mr Staal had made contracts that were outside their authority but within Vestia’s capacity, and made for the purpose of hedging. But here Mr de Vries and Mr Staal are said to have acted outside their authority solely because they entered into contracts that were outside Vestia’s capacity, and this (I add) was in turn because the contracts were not hedging transactions in the sense that I have described and made for the purpose of hedging. If they lacked authority to make the ultra vires contracts, that is an incident of the breach of the compliance provision in the Additional Representations and in turn (I add) a breach of the hedging provision. I therefore conclude that similarly it is not open to Vestia to dispute their liability to Credit Suisse on the grounds that the ultra vires contracts were made without their authority and so invalid.

Credit Suisse’s alternative argument is that, because Vestia were in breach of warranty, they are entitled to damages in the sum of €83,196,829: that is to say the loss that they suffered as a result of the ultra vires contracts being invalid. This claim turns mainly on the questions that I have considered in the context of (so-called) contractual estoppel. If Vestia were (as I have concluded) in breach of warranties in the Additional Representations (or at least the warranty in the compliance provision) but I am wrong to conclude that they give rise to a contractual estoppel or that Vestia are otherwise precluded by the Additional Representations from relying on the invalidity of the ultra vires contracts, then it follows from my other conclusions that their claim for breach of warranty succeeds. The amount of their damages depends, of course, upon the amount to which they would be entitled under the Master Agreement if all the transactions were valid.

Credit Suisse have another alternative claim, albeit for a much smaller amount. It is made on the basis that, if (i) they did not have capacity to enter into any of the disputed transactions, or if (ii) Mr de Vries and Mr Staal (or either of them) did not have authority to enter into the disputed transactions or give the Confirmations on Vestia’s behalf, then Vestia made negligent misrepresentations in the Master Agreement and the Management Certificate, and are entitled to recover damages in the amount that would put them in the position in which they would have been had they not entered into the Master Agreement or any transactions under it (or purportedly so). (They calculate that sum at €5,303,508.33, but I did not hear argument about that calculation and so do not determine whether or not it is right.) I shall deal with the claim briefly because it does not arise in view of my other conclusions. I shall assume, without deciding, that Vestia owed Credit Suisse a duty of care in respect of representations in the Master Agreement and the Management Certificate, although I consider it arguable that the Master Agreement spelt out all the parties’ obligations and that there is not scope for an extra-contractual duty of care. Nevertheless I reject the claim because:

The contractual provisions of the Master Agreement under which Credit Suisse went about terminating it were these. It was an Event of Default under the Master Agreement for either party:

Under the CSA one party (the “transferor”) might be obliged to transfer to the other party “Eligible Credit Support” in a “Delivery Amount”. Vestia and Credit Suisse stipulated that only cash denominated in Euros was eligible collateral. The “Delivery Amount” was calculated (subject to rounding) by reference inter alia to the Transferor’s “Exposure” as defined in the CSA and the “Value” of the agreed “Threshold”, which in this case was €100 million. Credit Suisse, as the “Valuation Agent”, were obliged to make calculations of “Value” and “Exposure” and to notify Vestia of them no later than the 1.00pm London time on the “Local Business Day” following the “Valuation Date”, which was each Tuesday. Therefore Credit Suisse were obliged to notify Vestia of their Exposure by 1.00pm on each Wednesday. The CSA also provided that, on demand made on or after a Valuation Date, a Transferor was entitled to have returned to him a “Return Amount” provided that it exceeded €250,000, which was the agreed “Minimum Return Amount”. It is not necessary to explain how the Return Amount was to be calculated.

“Exposure” was essentially defined as the amount (if any) payable by one party to the other if all relevant transactions were terminated as of the valuation date. Vestia’s Exposure on 5 June 2012 was calculated by Credit Suisse as Valuation Agent to be €109,142,968. (Because Monday 4 June 2012 and Tuesday 5 June 2012 were bank holidays, it was based on values at close of business on 1 June 2012.) On 6 June 2012 Credit Suisse sent Vestia by email a demand for collateral under the CSA in the sum of €9,150,000, the rounded Delivery Amount payable in respect of that Exposure. In a reply on 6 June 2012 Vestia referred to their announcement of 21 May 2012 and the standstill agreements of 29 May 2012, and they stated that therefore they were “not in a position to meet the collateral call”. Credit Suisse plead that Vestia thereby repudiated their obligations under the CSA, and that to do so was an Event of Default. Collateral was due under the demand on 7 June 2012. Vestia did not provide it, and Credit Suisse allege that this failure was another Event of Default. On 8 June 2012 Credit Suisse served notice of default, with the result that payment was due on or before 11 June 2012, the next business day. Credit Suisse did not serve a statement of exposure as on 12 June 2012. By then the market had so moved that Vestia’s Exposure had fallen below €100 million, and Mr Greitemann said that they knew that from their own systems without having the notice.

On 18 June 2012 Credit Suisse served notice on Vestia designating 18 June 2012 as an Early Default Date. (They had previously sent a notice on 15 June 2012 but it was defective: Credit Suisse do not rely on it, and it is irrelevant for present purposes.) On 19 June 2012 they sent Vestia their calculation that the Early Termination Amount was €83,196,829.

At trial Credit Suisse developed their case that there was an Event of Default in that Vestia did not provide collateral on 7 June 2012 or at any time thereafter. They did not develop their pleaded case that Vestia’s reply of 6 June 2012 gave rise to Events of Default (in that by it Vestia said that they were unable to pay their debts, or that it amounted to a rejection or repudiation of the Master Agreement.) Had anything turned upon it, I would have called upon Credit Suisse to clarify their position about those allegations before delivering this judgment, but in view of my other conclusions I need not do so, and I say nothing about them.

Credit Suisse accept that, unless the disputed transactions are valid or to be so regarded for the purpose of the Master Agreement, then they were not entitled to demand collateral, to serve notice of default or to receive any Early Termination Amount. They did not argue that even in these circumstances it was an Event of Default for Vestia to send their response of 6 June 2012: this argument would have raised questions about the proper interpretation of the Master Agreement about which I did not have submissions.

Vestia, however, submit that, even if the disputed transactions are valid or to be regarded as valid (or sufficient of them are to justify Credit Suisse’s demand for collateral), nevertheless they were and are not liable to pay an Early Termination Amount because:

If Vestia had served notice on Credit Suisse about their failure to notify Vestia of their exposure and Credit Suisse did not remedy it within 30 days, this would have been an Event of Default under the Master Agreement. It was therefore within the definition in the Master Agreement of a “Potential Event of Default”, which is “any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default”. Section 2(a)(iii) of the Master Agreement provided that:

“Each obligation of each party under section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing …”.

Vestia contended therefore that their obligation under section 2(a)(i) to transfer collateral was qualified by this provision, and was suspended when at 1.00 pm 13 June 2012 Credit Suisse failed to provide a statement of exposure. This interpretation of the Master Agreement, it is submitted, makes commercial sense in that parties need to know the amount of any exposure in order to deal with their obligations, not least because (as here) the exposure might have fallen back below the applicable threshold.

Credit Suisse in the end accepted that they were in breach of the Master Agreement in not providing a statement of exposure, and did not dispute that their failure to do so was a “Potential Event of Default”. They argued that by 13 June 2012 they had an accrued right to designate an Early Termination Date, and that their right to do so was not affected by section 2(a)(iii) or their failure to provide the statement of exposure. Their right had accrued under Section 6(a) of the Master Agreement, which provides as follows:

“If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions”.

Credit Suisse’s argument is supported by Lomas v JFB Firth Rixson Inc, [2012] EWCA Civ 419. That litigation was itself concerned with obligations arising after an Event of Default, but in their judgment the Court of Appeal said this (at paragraph 21):

“It is necessary here to draw a distinction between sums due but unpaid before the occurrence of an event of default (or, indeed, the fruition of a potential event of default) and sums becoming due after the occurrence of the event of default. The parties to the first appeal accepted that sums due but unpaid before the occurrence of the event of default must be due and payable and remain due and payable. We do not believe it strictly necessary to decide conclusively in the first appeal whether this is correct but if we had to we would conclude that once such sums were due they should be paid regardless of any subsequent event of default. If, moreover, even sums already ‘due’ at the time of the occurrence of an event of default did not have to be paid, that might be relevant to the arguments made on the second appeal in relation to anti-deprivation.”

As the Court recognised, these views were expressed obiter, but they were the considered views in the judgment of the whole Court.

Vestia submitted that the facts of this case are significantly different from the Lomas case, litigation that arose out of Lehman Brothers International (Europe) (“Lehman”)going into administration, which was an Event of Default under ISDA Master Agreements that Lehman had with various counterparties. The counterparties, though entitled to terminate their agreements, did not do so because they would have had to make payment to Lehman. They simply stopped making payments, and the transactions between Lehman and the counterparties ran to maturity. The Event of Default, therefore, was that Lehman went into administration. It was submitted on behalf of Vestia that a term relieving the counterparty of a payment obligation on such an Event of Default would be likely to fall foul of anti-deprivation principles, and that the Court of Appeal would not have made their observations, or would not have made them in such general terms, if they had considered the position in relation to Events of Default or Potential Events of Default that were not by way of, or associated with, insolvency.

I cannot accept Vestia’s submission. Nothing was said in the judgment of the Court of Appeal to indicate that the observations were not of general application, and I can see no principled basis for interpreting section 2(a)(iii) so as to have a different effect here from that which it was given in the Lomas case. The section provides for a condition precedent to the party’s payment obligations, and therefore its effect would be to prevent obligations arising. As a matter of construction, it does not apply so as to suspend payment obligations that have accrued.

In their written submissions Credit Suisse put forward another argument, citing Firth, Derivatives Law and Practice (cit sup), which states this at paragraph 11.049, which considers the provisions in the ISDA Master Agreement about “simultaneous default”:

“Each party could also be subject to an Event of Default or Potential Event of Default as a result of entirely unconnected events. For example, one party may commit a Cross Default at a time when the other party is insolvent. In these circumstances, an Early Termination Date may be designated by either party: the fact that the party serving the notice was subject to a continuing Event of Default at the time when the notice was served, or the Event of Default relied on was committed, does not invalidate the notice.”

Firth cites in support of this view the decision of the Ontario Court of Appeal in Barclays Bank Plc v Metcalfe & Mansfield Alternative Investments VII Corp, [2013] OJ no 3691, which concerned financial arrangements between the Devonshire Trust (“Devonshire”) and Barclays Bank PLC (“Barclays”) and the results of the collapse in August 2007 of the Canadian ABCP (asset-backed credit paper) market. The Court had to consider the meaning and effect of the ISDA Master Agreement. The facts of the case are complicated, but what matters for present purposes is that on 13 January 2009 Devonshire were insolvent and their insolvency was an Event of Default, and a question arose as to whether this prevented them from serving on Barclays a valid notice of Event of Default on the basis of Barclays’ failure to make liquidity payments. In a judgment of the Court, the Ontario Court of Appeal concluded that it did not do so, and they said this (at paragraphs 194 and 195):

“As a practical matter, there can be more than one Event of Default at any given time so that each party can be both a Defaulting Party and a Non-defaulting Party with respect to different Events of Default. If they are both non-defaulting parties with respect to different purported Events of Default, each party has the right to serve a Notice of Early Termination on the other. Firth refers to “simultaneous default” and provides the following illustration: “If neither party performed on the due date, both would be in breach of contract. Either could then give notice of the failure to pay or deliver to the other and, if the default is not cured by the end of the grace period, close out the outstanding transactions”: at para 11.049.

In our view, it follows that there is nothing in the Agreements that precludes a party in default under some other obligation from delivering a valid Notice of Early Termination if it is a Non-defaulting Party with respect to the specified Event of Default. Devonshire is a Non-defaulting Party with respect to Barclays’ failure to make the liquidity payments. It follows that under the ISDA Master Agreement, even if Devonshire’s insolvency made it a Defaulting Party with respect to the Event of Default of insolvency, its insolvency did not preclude it from delivering an effective Notice of Early Termination to Barclays under s.6(a) of the ISDA Master Agreement with respect to Barclays’ failure to make the liquidity payments.”

This argument was not developed orally by Mr Howe, and its implications are of general importance. Having reached a clear conclusion in Credit Suisse’s first argument, I need not and do not express any view either about the correctness of the judgment of the Ontario Court or about the application to its reasoning to the facts of this case.

I come to Vestia’s contention that Credit Suisse were not entitled to give notice of an Event of Default because (as is not disputed) by 18 June 2012 their Exposure was below the applicable threshold, that is the amount at which they could require Vestia to provide collateral of more than the Minimum Return Amount. Vestia therefore contended (i) that it would have been pointless for them to have provided collateral, because Credit Suisse would have been obliged immediately to have returned it to them, and therefore they were not obliged to provide it; and (ii) that, in the terms of section 6(a), therefore their failure to provide collateral was not “then continuing” at the Early Termination Date.

In response Credit Suisse disputed that it would have been pointless for Vestia to have provided collateral and submitted that it made good commercial sense for them to insist that collateral be provided, notwithstanding the market so moved as to reduce the Exposure below the applicable threshold. They relied on evidence of Mr Grove, who said that it is usual for dealers to insist on the provision of collateral in these circumstances. He considered that there are practical business reasons for them doing so:

I accept Mr Grove’s evidence about this. At least the first two reasons seem to me to make business sense. In any case Mr Grove was a well-informed and reliable witness about market matters, and his evidence makes it clear that those in the market see purpose in the provision. I would be slow to dismiss as commercially pointless a provision in a contract that has been so widely accepted in the market as the ISDA Master Agreement. As it was put by Mr Cathrew (who was not, I recognise, an expert witness but who articulated what I understood to be Mr Grove’s opinion and what I should in any case have supposed), “In the interests of market certainty, when collateral calls are made, they should be honoured. That is how the market functions, and it could not function without such certainty”.

More importantly, in my judgment there is no proper reason to give the Master Agreement an interpretation that would prevent the parties from exercising their contractual rights in circumstances where the court sees no commercial point in them doing so, and there is no proper basis on which a term to this effect is to be implied into the Master Agreement. As I understand it, Vestia’s case was that the question whether there was commercial point in Credit Suisse exercising their rights was to be determined objectively (although to my mind this underlines the difficulties in their argument). I would however, have been no more convinced by an argument that contemplated that rights could be exercised only if the party exercising them thought that it were acting in its commercial interests, or that allowed it some margin of appreciation.

Nor can I accept that, when on 18 June 2012 Credit Suisse designated the Early Termination Date by notice, Vestia’s Event of Default was not “then continuing” within the meaning of article 6(a). It is nothing to the point, as I see it, that by 12 June 2012 Credit Suisse could not have called for the provision of collateral. Vestia’s obligation to provide collateral accrued on 7 June 2012, and they had still not provided it by 18 June 2012. That is the Event of Default that was “then continuing”, and that is the long and the short of it.

I reject both of Vestia’s arguments that Credit Suisse did not validly terminate the Master Agreement.

I have concluded that, although three of the contracts, comprising six of the disputed transactions, were outside Vestia’s capacity and therefore invalid, nevertheless because of the warranties in the Additional Representations, or at least in the compliance provision, this did not affect Credit Suisse’s rights or Vestia’s obligations under the Master Agreement, or alternatively that Credit Suisse are entitled in damages for breach of the warranties to the amount that they could have recovered under the Master Agreement if all the disputed transactions were valid and binding on Vestia. Therefore Credit Suisse are entitled to recover what would have been the Early Termination Amount in those circumstances, or damages in that amount.

I therefore allow Credit Suisse’s claim under the Master Agreement. The amount that they recover will depend upon the determination of the issues between the parties about the calculation of the Early Termination Amount. I ask that the parties consider how those issues can best be resolved (and no doubt they will consider whether they are more efficiently and satisfactorily determined by an arbitrator or an expert rather than a court hearing). I ask counsel to seek to agree upon the terms of an order to give effect to this judgment.