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Banco Santander Totta SA v. Companhia Carris De Ferro De Lisboa SA & Ors

In a judgment handed down on 13 December, the Court of Appeal (Sir Terence Etherton MR, Longmore LJ, and Sir Martin Moore-Bick) upheld the decision of Blair J, handed down in March 2016, in the first trial to be heard in the Financial List, and the first appeal from a Financial List judgment.

The case arose out of ‘snowball’ swaps sold by Banco Santander Totta (‘BST’), a Portuguese bank in the Santander group, to four Portuguese transport authorities between 2005 and 2007. The swaps were concluded under ISDA Master Agreements. As a result of the unexpectedly low interest rates which have persisted since the global financial crisis of 2008, these swaps have turned out to be substantially loss-making for the transport companies. As at October 2016, the transport companies were paying interest rates ranging from 30% to over 92%, and as at October 2015 the mark-to-market value of the swaps was negative in the amount of approximately €1.3 billion.

BST sought declarations as to the validity and enforceability of the swaps, and payment of outstanding amounts. At trial, in which Laurence Rabinowitz QC led John Odgers QC, Simon Colton and Mehdi Baiou, Blair J rejected a number of defences raised by the transport companies, including as to their capacity to conclude the swaps, alleged breaches of the Portuguese Securities Code, arguments that the swaps were void under Portuguese law as gaming contracts, and arguments that mandatory Portuguese law, under Article 437 of the Portuguese Civil Code, required the contracts to be terminated in light of the abnormal change of circumstances resulting from the global financial crisis.

On appeal, the transport companies sought to rely on just one of the defences – the Article 437 defence. In light of the judge’s findings, this turned on whether Article 3(3) of the Rome Convention was engaged, on the basis that although the parties had chosen English law and English jurisdiction, “all the other elements relevant to the situation at the time of the choice are connected with [Portugal] only”, and whether Article 437 was a rule of Portuguese law that “cannot be derogated from by contract” and therefore mandatory.

The Court of Appeal accepted BST’s arguments that the test to be applied in determining the engagement of Article 3(3) of the Rome Convention was whether the situation was ‘purely domestic’, and that the situation of these swaps was not ‘purely domestic’ given the international nature of the swaps market, the use of a ‘Multicurrency-Cross Border’ ISDA form, and the foreseeability that the risks in the swaps might be hedged across international borders through back-to-back swaps. Accordingly, Article 3(3) of the Rome Convention was not engaged, and the transport companies’ appeal failed.

In light of the Court of Appeal’s decision its views on whether Article 437 could be ‘derogated from by contract’ within the meaning of Article 3(3) did not arise. Obiter, Sir Terence Etherton MR, with whom Sir Martin Moore-Bick agreed, expressed the view that Article 437 was mandatory. Longmore LJ expressed the view that it might be regarded only as ‘gap-filling’, and not mandatory.

BST was represented on the appeal by Laurence Rabinowitz QC, leading John Odgers QC and Simon Colton. Please find attached a copy of the judgment here.