Banco Santander Totta SA v (1) Companhia De Carris De Ferro De Lisboa SA (2) Sociedade Transportes Colectivos Do Porto SA (3) Metropolitano De Lisboa Epe (4) Metro Do Porto SA1

Summary: The High Court held that Article 3(3) of the Rome Convention 1980 (Article 3(3)) could not be used to displace a contractual choice of English law with certain mandatory provisions of Portuguese law even where both contracting parties were Portuguese.

The claimant was Banco Santander Totta (BST) and the defendants were Portuguese public sector transport companies (Transport Companies). Between 2005 and 2007, the Transport Companies entered into several interest rate “snowball” swaps with BST under ISDA Master Agreements subject to English law and jurisdiction.

Under the swap agreement, BST paid the Transport Companies an interest rate of 3% on terms that, after a two year period, the Transport Companies would be liable to pay an additional increased rate on top of their fixed rate.

After the expiry of the two year period in 2009, the Transport companies had to pay interest at a very high rate (up to 40%) under the swap agreement at a time when Euribor rates were around 1%.

By 2013, the Transport Companies had failed to make payments under the swaps with the total unpaid amount stated to be €272.5m.

BST brought proceedings seeking a declaration that the Transport Companies’ obligations under the swaps agreement were valid and enforceable and for payment of the sums due to it pursuant to those obligations.

The Transport Companies’ defence was that:

  • all of the relevant elements of the swaps were connected to Portugal and that under  Article 3(3), certain Portuguese laws relating to gaming and betting, and rules dealing with an “abnormal change of circumstances” (Portuguese Mandatory Rules), would apply to the case. As a result, the swaps contravened the Portuguese Mandatory Rules and were void
  • under Portuguese law, they lacked capacity to enter into the swaps, and that BST had acted  in breach of duties owed to customers under the Portuguese Securities Code in presenting the swaps to them. As a result, the Transport Companies were entitled to claim against BST in damages which would extinguish their liabilities under the swaps.

The Court concluded that Article 3(3) was not engaged because all the elements relevant to the situation were not solely connected with Portugal. The swaps were not purely domestic contracts. In particular, the Court relied upon:

  • the right to assign BST’s rights and obligations to a bank outside Portugal
  • the use of standard international documentation (the ISDA Master Agreements)
  • the practical necessity for the relationship with a bank outside Portugal
  • the international nature of the swaps market in which the contracts were concluded
  • the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements were routine.

Accordingly, the Portuguese Mandatory Rules did not apply and the swaps were binding on the Transport Companies.

The Court rejected the Transport Companies’ arguments on lack of capacity and held that they had had legal capacity to enter into the swaps. The swaps were capable, at the time of their execution, of assisting the Transport Companies to achieve their purpose of pursuing profit or operating a transport system.

Further, the Court commented that it is the nature of interest rate swaps that a movement in interest rates that is positive for one party will be negative for the other. It stated that a bank cannot be expected to give preference to the counterparty’s interests over its own when it is dealing on its own account. On this basis, the Court concluded that the alleged duties under the Portuguese Securities Code did not exist. Thus there was no issue of breach of duties.

It is interesting to note that the use of standard ISDA Master Agreements was considered by this Court to be a relevant factor with regard to Article 3(3) in the present case, which is a departure from a previous decision in Dexia Crediop SpA v Comune di Prato2.