Court of Appeal upholds English court's jurisdiction in Portuguese derivatives case

The judgment upholds a High Court decision from earlier this year, in which Mr Justice Blair ruled that the provisions of the 1980 Convention on the Law Applicable to Contractual Obligations (Rome Convention) could not override the choice of law in the ISDA Master Agreement. The transport companies had argued that because "all the other elements relevant to the situation", in the words of the convention, were connected with Portugal, Portuguese law should apply.

The Court of Appeal agreed with the High Court judge that the "natural and ordinary meaning" of the words did not restrict the Rome Convention "elements relevant to the situation" term solely to "factors connecting the contract to a particular country in a conflict of laws sense". Where elements of the contract were not "purely domestic", as was the case here, the Rome Convention was not engaged, it said.

"This decision will be warmly welcomed by legal practitioners and bankers alike, not least of all as it reinforces the long-held view that the English courts will rarely depart from the terms of such a critically important global financing contract," said commercial litigation expert Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com.

There are two conflicting decisions of the High Court on whether the English law clause in the IDSA Master Agreement is effective or not, he said. In 2015, Mr Justice Walker took a more restrictive approach to the Rome Convention in a similar dispute between the Italian municipality of Prato and Dexia Crediop, an Italian bank, and an appeal is due to be heard in spring 2017, he explained.

"Post Dexia, banks contracting with their foreign customers under an English law ISDA had been wary of mandatory local laws that might give customers room to avoid obligations, but perhaps these concerns will now subside, at least a little," he said.

The Portuguese transport companies entered into nine long-term interest rate swaps with Santander between 2005 and 2007 using the ISDA Master Agreement, which contains an English jurisdiction clause. The idea was to protect the companies from the impact of interest rate changes. However, the 'exotic' design of the products combined with the impact of near-zero interest rates since the 2008 financial crisis substantially increased the amount payable to Santander under the agreements.

The transport companies stopped making payments under the swaps in 2013 and, as of October of that year, owed €272.5 million. The mark-to-market value of the swaps is now €1.3 billion in favour of Santander. While they did not dispute the amount due, they claimed that they lacked the capacity under Portuguese law to enter into the agreements in the first place. Their reasons included that some of the contracts could be terminated under local rules dealing with an 'abnormal change of circumstance' relating to the financial crisis.

In his March 2016 High Court decision, Mr Justice Blair interpreted the words "all the other elements relevant to the situation" widely. This meant that he could take into account the fact that the ISDA was an international agreement, that it was capable of being assigned by Santander and that the risk ultimately lay with the bank's Spanish parent bank. The contract also related to the international reference rates of LIBOR and EURIBOR, he found.

The Court of Appeal unanimously agreed.

"If it had been intended that 'elements relevant to the situation' … should be confined to factors of a kind which connect the contract to a particular country for the purpose of identifying the proper law in the absence of an express choice, the drafter could have used the familiar and simple conflict of laws language of 'close connection'," said Master of the Rolls Sir Terence Etherton, giving the judgment of the court.

"Insofar as [Mr Justice Walker] in Dexia reached a different conclusion on the proper interpretation of [the provision], that is to say by confining 'elements of the situation' to those with a connection to a particular country in a conflict of laws sense, I respectfully disagree with him," he said.