Banco Santander Totta SA v Companhia Carris De Ferro De Lisboa SA & Ors, Court of Appeal - Civil Division, December 13, 2016, [2016] EWCA Civ 1267

Resolution Date:December 13, 2016
Issuing Organization:Civil Division
Actores:Banco Santander Totta SA v Companhia Carris De Ferro De Lisboa SA & Ors

Case No: A3/2016/1781, 1782, 1783 & 1785

Neutral Citation Number: [2016] EWCA Civ 1267





Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 13/12/2016






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Ali Malek QC, Richard Brent and Kate Holderness (instructed by Lipman Karas LLP) for the Appellants

Laurence Rabinowitz QC, John Odgers QC and Simon Colton (instructed by Slaughter and May) for the Respondent

Hearing dates: 01 & 02 November 2016

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JudgmentSir Terence Etherton, MR:

  1. This appeal relates to seven interest rate swaps (out of a total of nine) entered into between the appellants, Portuguese public sector transport companies (``the TCs''), and the respondent, a Portuguese bank (``Santander''), under ISDA Master Agreements subject to English law and jurisdiction (``the Swaps''). The appeal concerns the proper meaning of Article 3(3) of the Convention on the Law Applicable to Contractual Obligations 1980 (``the Rome Convention'') and its application, if any, to Article 437 of the Portuguese Civil Code (``Article 437'').

  2. The appeal is from an order of Mr Justice Blair dated 24 March 2016, sitting as a judge of the Financial List, by which, among other things, he declared that the appellants' obligations under the respective Swaps are legal, valid and binding obligations enforceable in accordance with the terms of the respective Swaps.

  3. This was the first case to be heard in the Financial List, which is a specialist List established in the Rolls Building in London on 1 October 2015 to handle claims related to the financial markets. This appeal is the first appeal from the Financial List.

    The factual background

  4. The full factual background to the proceedings, set out at length in the judgment of the Judge, is complex. The following is a very brief summary sufficient to understand the context of this appeal.

  5. Santander is a member of the Banco Santander group. Between June 2005 and November 2007 it entered into the Swaps with the TCs, which run the metro, bus and tram services in Lisbon and in Porto, Portugal.

  6. The Swaps are long-term interest rate swaps, under which Santander was (with one exception) the floating rate payer and the TCs were the fixed rate payers. An unusual feature of the Swaps was that once the reference interest rates (EURIBOR and sometimes LIBOR) moved outside upper or lower ``barriers'', the fixed rate payable by the TCs had a ``spread'' added to it. The spread was cumulative at each payment date and was subject to leverage: hence the Swaps being described as ``snowball'' swaps.

  7. The Swaps initially provided positive cash flows for the TCs. The consequence, however, of sustained near zero interest rates since 2009 and the ``snowball'' structure of the Swaps is that the interest rates payable under the Swaps have increased very substantially. An agreed table of interest rates payable as at 21 October 2016 under the Swaps shows interest rates of between just under 30% to over 92%. Furthermore, by 1 October 2015 the mark-to-market value of the Swaps had become negative in an amount in excess of €1.3 billion.

  8. The TCs ceased to make payments under the Swaps in 2013.

    The proceedings

  9. Santander commenced these proceedings for declarations that the TCs' obligations under the Swaps constitute legal, valid and binding obligations, enforceable in accordance with their respective terms, together with an order for payment of the sums due or equivalent damages. The total amount claimed by Santander to be due as at 1 October 2015 was €272,561,157. That figure was not disputed.

  10. The TCs advanced the following defences. First, under Portuguese law each of the TCs lacked capacity to enter the Swaps which are therefore void. Secondly, the effect of Article 3(3) of the Rome Convention is that, even though the ISDA Master Agreements specified that they were governed by English law, certain mandatory rules of Portuguese law apply, under which (1) the Swaps are void for being unlawful "games of chance" or speculations, and (2) they are liable to be terminated under Article 437 due to abnormal change of circumstances since the Swaps were entered into. Thirdly, Santander was in breach of its duties under the Portuguese Securities Code, entitling the TCs to damages which extinguish their liabilities under the Swaps.

    The Rome Convention

  11. The following provisions of the Rome Convention are particularly relevant to the appeal.

    ``Article 1

    Scope of the Convention

  12. The rules of this Convention shall apply to contractual obligations in any situation involving a choice between the laws of different countries. ...''

    ``Article 3

    Freedom of choice

  13. A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

  14. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice under this Article or of other provisions of this Convention. Any variation by the parties of the law to be applied made after the conclusion of the contract shall not prejudice its formal validity under Article 9 or adversely affect the rights of third parties.

  15. The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law of that country which cannot be derogated from by contract, hereinafter called 'mandatory rules`. ...''

    ``Article 4

    Applicable law in the absence of choice

  16. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a separable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

  17. Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.


  18. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.''

  19. Article 5 concerning certain consumer contracts and Article 6 concerning employment contracts provide for specified laws to apply, notwithstanding the provisions of Article 3, for the protection of the consumer and the employee respectively. Article 7 also provides for the mandatory rules of a country, with which the situation has a close connection or which is the forum, to be applied notwithstanding it is not the law that would otherwise be applicable under the Rome Convention.

  20. The Rome Convention was (subject to certain exceptions) given effect in the law of the United Kingdom by the Contracts (Applicable Law) Act 1990 s.2. Section 3(1) of the 1990 Act provided that any question as to the meaning or effect of any provisions of the Convention shall be determined in accordance with the principles laid down by, and any relevant decision of, the European Court (``the CJEU''). Section 3(3) provided that the report on the Rome Convention by Professor Mario Giuliano and Professor Paul Lagarde (``the Giuliano-Lagarde Report'') may be considered in ascertaining the meaning or effect of any provision of the Rome Convention.

  21. It is common ground that the Rome Convention was adopted as part of the then European Community's programme to establish uniform rules across the Community in the field of private international law, and was intended to be complementary to the Brussels Convention. It is also common ground that, like any other international treaty and EU legal instrument, it is to be interpreted adopting a purposive approach.

  22. The Rome Convention was replaced by Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (``Rome 1''), which came into effect on 17 December 2009. The Rome Convention applies to the Swaps because they were all concluded before that date.

  23. There is continuity in some respects between the Rome Convention and Rome 1, including, in particular, Articles 1(1) and 3(3) of the Rome Convention and Rome 1 respectively. Recital (15) of Rome 1 states expressly that (even though the wording of Article 3(3) of Rome 1 is different) no substantial change was intended compared with Article 3(3) of the Rome Convention. This is why the Judge in his judgment and the parties in their submissions before us have made references to Rome 1.

  24. We were referred to a...

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