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Portugal loses court case over derivatives jurisdiction

Portugal's state owned transport companies may be forced to pay €272 million to Santander on interest-rate swaps after the UK High Court ruled that English law should apply.09 Mar 2016

Four Portuguese transport companies entered into nine long-term interest rate swaps with Santander between 2005 and 2007, under agreements subject to English law, the judgement said. These were expected to protect the companies from the impact on interest rate changes.

However, the 'exotic' design of the swaps, added to the impact of near-zero interest rates since the financial crisis of 2008, "very substantially" increased the amount payable to Santander by the transport companies, Justice Blair said.

The transport companies ceased to make payments under the swaps in 2013, and as of October 2015 owed €272.5 million.

The transport companies did not dispute the amount due, but claimed that under Portuguese law they lacked the capacity to ender into the swaps in the first place. The swaps constituted 'games of chance', and were therefore void, and seven of the nine could also be terminated under rules dealing with an 'abnormal change of circumstance' relating to the financial crisis, they said.

Although English law governed the original agreements, they were subject to the Rome Convention which provided that where "all the elements relevant to the situation at the time of the choice of law are connected with one country only, the choice does not prejudice the application of rules of the law of that country which cannot be derogated from by contract", the Portuguese companies argued.

Mr Justice Blair said he accepted that the global financial crisis was an abnormal change in circumstances, and that the transport companies would have been able to terminate most of the contracts if Portuguese law had applied. However, he disagreed with an earlier English court ruling on a similar case that said European conflict of law rules should apply.

The swaps were, "concluded in an international market for such derivatives" and under a International Swaps and Derivatives Association (ISDA) master agreement governed by English law. The evidence shows that over the period in question two of the transport companies entered into swaps with a range of international banks from different countries, Justive Blair said.

A specific Portuguese agreement was available and had been used for earlier swaps, but by the time of the transaction in question, the parties had switched to ISDA, the judgement said.

"The evidence is to the effect that this was a mutual decision," he said.

The precise payment terms will be announced later this month.

Litigation expert Stuart McNeill of Pinsent Masons, the law firm behind said:  "The decision to uphold the English law provision in the ISDA Master Agreement will be welcomed in some circles. It follows the opposite conclusion being reached in the Dexia litigation last year in which the same court applied Italian law notwithstanding the ISDA nominating English law. Given the importance of the factual matrix in such cases, it remains to be seen which view is incorrect, if, indeed, either is, but the appeal hearing next year in Dexia provides a welcome opportunity for clarification on the scope for stepping outside of Master Agreements regarding choice of law."

António Costa, Portuguese prime minister, said "This is obviously not good news and means more costs for the state … We will honour and comply with the court’s decision. We’ll have to see what impact the payments will have and in what year," the Financial Times reported