Anco Santander Totta S.A. v Companhia De Carris De Ferro De Lisboa S.A. and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Blair |
| Judgment Date | 04 March 2016 |
| Neutral Citation | [2016] EWHC 465 (Comm) |
| Docket Number | 2013 Folios 000953, 001140, 001141, 000714, 001112 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 04 March 2016 |
[2016] EWHC 465 (Comm)
R Justice Blair
2013 Folios 000953, 001140, 001141, 000714, 001112
IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT FINANCIAL LIST
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Laurence Rabinowitz Q.C., John Odgers Q.C., Simon Colton, and Mehdi Baiou (instructed by Slaughter and May) for the Claimant
Ali Malek Q.C., Richard Brent, and Kate Holderness (instructed by Lipman Karas LLP) for the Defendants
Hearing dates: 12th, 13th, 14th, 15th, 19th, 20th, 21st, 22nd, 26th, 27th, 28th, 29th October, 2nd, 3rd, 4th, 5th, 9th, 10th, 12th, 13th, 16th, 17th November, 9th and 10th December 2015
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Table of Contents
| PART A: INTRODUCTION | 7 |
| The issues and the parties' contentions | 8 |
| The trial | 10 |
| PART B: THE FACTS | 12 |
| The defendant companies | 12 |
| The background to the swap transactions | 13 |
| The parties' relationship | 13 |
| The position of Santander Spain | 14 |
| The alleged financial sophistication of the Transport Companies | 16 |
| Whether the Transport Companies understood the risks | 18 |
| (i) Selling volatility | 18 |
| (ii) The overall picture | 19 |
| (iii) The MtMs | 22 |
| (iv) Metropolitano de Lisboa | 22 |
| (v) Metro do Porto | 22 |
| (vi) Carris | 23 |
| (vii) STCP | 24 |
| (viii) The court's findings | 25 |
| The Transport Companies' purpose in entering into the swaps | 27 |
| The nine swaps | 28 |
| The back-to-back contracts | 32 |
| The selling of snowball swaps is stopped by Santander Spain | 32 |
| Dynamic management and restructuring proposals | 33 |
| Payment ceases | 38 |
| The Parliamentary Committee of Inquiry | 38 |
| PART C: CHARACTERISATION AND THE SPECULATION ARGUMENT | 39 |
| Introduction: the parties' cases | 39 |
| The expert witnesses | 39 |
| The Transport Companies' first question—are the swaps interest rate risk management instruments, and/or instruments for the reduction of borrowing costs? | 40 |
| The Transport Companies' second question—are the swaps speculative instruments? | 44 |
| PART D: THE COURT'S APPROACH TO ISSUES OF PORTUGUESE LAW | 46 |
| The approach of the English court to issues of foreign law | 46 |
| The structure of Portuguese law | 48 |
| PART E: THE CAPACITY ISSUE | 49 |
| The issues | 49 |
| The nature of the Transport Companies | 51 |
| The parties' contentions 51 (i) Professor Duarte 52 (ii) Professor Antunes | 53 |
| Discussion and conclusion | 55 |
| (i) Introduction | 55 |
| (ii) The opposing opinions | 56 |
| (iii) English authorities | 61 |
| (iv) Conclusion as to the capacity test | 61 |
| (v) The capacity of MdL on the basis that BST's capacity test is correct | 62 |
| (vi) Conclusion as to the capacity of MdL on the basis that BST's capacity test is correct | 64 |
| (vii) The Company Law Directives point | 65 |
| PART F: NON-DEROGABLE RULES: ART 3(3) OF THE ROME CONVENTION | 65 |
| The dispute | 65 |
| The terms of Article 3(3) | 66 |
| Principles of interpretation | 67 |
| The issues as to Article 3(3) | 68 |
| The Transport Companies' arguments summarised | 69 |
| BST's arguments summarised | 70 |
| The law as to the application of Article 3(3) | 71 |
| (i) Authority at the European level | 71 |
| (ii) English court decisions | 73 |
| (iii) Portuguese court decisions | 73 |
| (iv) Analysis of the key issues | 74 |
| (v) The court's conclusion as to the approach to the application of Art. 3(3) | 76 |
| The application of Article 3(3) on the facts | 78 |
| Whether Art. 437 of the Portuguese Civil Code is a "mandatory rule" | 82 |
| PART G: THE "GAME OF CHANCE" ISSUE | 82 |
| Introduction | 82 |
| The relevant provisions of the Civil Code | 82 |
| The parties' contentions | 83 |
| The experts | 84 |
| The jurisprudence | 85 |
| Discussion and conclusion | 86 |
| (a) Pre and post-MiFID | 86 |
| (b) The swaps had a non-speculative purpose | 89 |
| (c) Conclusion | 89 |
| PART H: THE ABNORMAL CHANGE OF CIRCUMSTANCES ISSUE | 90 |
| Introduction | 90 |
| Rebus sic stantibus and Art. 437 of the Civil Code | 91 |
| The parties' contentions summarised | 91 |
| The issues | 92 |
| (1) Whether Art. 437 is a "mandatory rule" | 92 |
| (i) The court's approach to the question | 92 |
| (ii) The parties' contentions | 94 |
| (iii) The jurisprudence (case law) | 94 |
| (iv) Doctrine | 96 |
| (v) The experts' arguments | 97 |
| (vi) The court's conclusion on whether Art. 437 is "mandatory" | 99 |
| (vii) What the position would be if this conclusion is wrong | 100 |
| (2) The Portuguese case law | 102 |
| (i) The decisions | 102 |
| (ii) The court's consideration of the cases | 105 |
| (3) The circumstances on the basis of which the parties entered the swaps | 107 |
| (i) The parties' cases | 107 |
| (ii) The parties' expectations | 108 |
| (4) Whether there has been an abnormal change in circumstances | 109 |
| (i) Portuguese law | 109 |
| (ii) The facts—the effect of the Global Financial Crisis | 109 |
| (a) The parties' cases | 109 |
| (b) Changes in the benchmarks are irrelevant | 110 |
| (c) The expert evidence | 111 |
| (d) The onset and development of the global financial crisis (GFC) | 111 |
| (e) The parties' contentions: discussion and conclusions | 112 |
| (5) Whether, if there has been an abnormal change, that change forms part of the risks covered by the contract | 116 |
| (6) Whether requiring the Transport Companies to continue to perform their obligations under the swaps would be a serious breach of the principles of good faith | 119 |
| Remedies | 120 |
| PART I: THE SECURITIES CODE ISSUE | 120 |
| Introduction | 120 |
| The articles of the Securities Code on which the claim is based | 121 |
| The issues | 121 |
| The Transport Companies' contentions summarised | 122 |
| BST's contentions summarised | 123 |
| The Transport Companies' pleaded case | 124 |
| The expert evidence | 126 |
| BST duties when it acted as a financial intermediary on its own account 127 ( i) The experts' opinions | 127 |
| (ii) The court's findings | 129 |
| Breach of duty under the Securities Code | 131 |
| Limitation | 132 |
| Other issues | 133 |
| PART J: REMEDIES | 133 |
| PART K: CONCLUSION | 134 |
| The facts | 134 |
| The law | 135 |
| ANNEX | 138 |
PART A: INTRODUCTION
The claimant, Banco Santander Totta S.A. (which was formed by the merger of Banco Totta & Açores, S.A. and two other Portuguese banks) is a Portuguese bank, and a member of the Banco Santander group, the global banking group based in Madrid, Spain. It is referred to in this judgment as " BST" or " the bank".
The defendants are public sector Portuguese transport companies which run the metro, bus and tram services which serve the cities of Lisbon and Porto, Portugal. They are:
(1) Companhia de Carris de Ferro de Lisboa, SA, referred to in this judgment as " Carris";
(2) Sociedade Transportes Colectivos do Porto SA, referred to in this judgment as " STCP";
(3) Metropolitano de Lisboa EPE, referred to in this judgment as " MdL"; (4) Metro do Porto SA, referred to in this judgment as " MdP".
The defendants are referred to as a group as the " Transport Companies".
These proceedings relate to long-term interest rate swaps entered into between the bank and the Transport Companies between 6 June 2005 and 2 November 2007. The swaps were entered into under ISDA Master Agreements subject to English law and jurisdiction.
Nine such swaps are the subject of the claims. The terms differ, and are set out in agreed tables in the Annex to this judgment. There is a summary table in paragraph 150 below.
Generically, these are so-called "exotic" swaps, as opposed to so-called "vanilla" or "plain vanilla" swaps which involve the simple swapping of a fixed for a floating rate of interest or vice versa.
In these cases, the bank was the floating rate payer 1 and the Transport Companies were the fixed rate payers. What makes the swaps unusual was the incorporation of a "memory" feature. Speaking generally, once the reference interest rates (EURIBOR and sometimes LIBOR) moved outside upper or lower "barriers", the fixed rate payable by the Transport Companies had a "spread" added to it. The spread was cumulative at each payment date, and was subject to leverage (in all but one swap), hence the swaps being described as "snowball" swaps.
The spread provisions took effect after a "holiday" which varied from between six months and four years. Five of the swaps incorporated "mitigating" features, one being a "reset", and the others being designed to bring rates gradually down when
interest rates moved back within the barriers (though as explained below these have not taken effect)Though initially providing positive cash flows for the defendants, the result of sustained near zero interest rates since 2009 following the financial crisis together with the memory feature and leverage has been to activate the spread, very substantially increasing the interest rates payable by the defendants under the swaps. The mark-to-market value of the swaps has also been affected. By 1 October 2015, their combined MtM value was negative 2 in an amount in excess of €1.3 billion.
The Transport...
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