Has contractual estoppel grown teeth? Damages awarded for breach of warranty under 2002 ISDA Master Agreement despite agreement being void for lack of capacity

In Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), the Commercial Court may have paved the way to get around capacity issues contractually.


In this decision, the court tried to tackle capacity and authority issues surrounding multiple derivative trades under an International Swaps and Derivatives Association (ISDA) 2002 agreement (the Master Agreement). The result was an award of damages against a Dutch housing association (Vestia) for breach of warranty. The damages were awarded, however, even though certain derivatives were void due to Vestia's lack of capacity to enter into them.

The dispute arose when Credit Suisse International (Credit Suisse) terminated the Master Agreement after Vestia had failed to meet a call for collateral. Vestia argued that it lacked the capacity to enter into the transactions in the first place and therefore was not responsible for paying the termination payment.

Among other things, the court determined whether:

  1. various derivatives entered into by Vestia were outside the scope of its constitutional documents under Dutch law (i.e. ultra vires)
  2. the derivatives were void under English law due to lack of capacity and authority
  3. multiple derivatives formed part of the same agreement under the Master Agreement
  4. derivatives that were entered into ultra vires had caused all transactions under the same Master Agreement to be void
  5. damages could be awarded for a breach of warranty in the Master Agreement, even though the transactions were void.


Mr Justice Andrew Smith held that certain hedge arrangements were ultra vires under Dutch law and, as a result, the English law-governed contracts were void. He also held that Vestia's directors lacked authority to bind Vestia to the contracts, because no director or agent has the authority to bind a company to obligations where it lacks capacity.

Vestia argued that the individual transactions formed an entire agreement, which caused all related transactions to be void, including those that would otherwise legally binding. The court agreed that a single contract cannot be in part ultra vires; rather, a contract is either within a party's capacity or it is not.
The court grouped individual transactions together to form single contracts under the Master Agreement. It did so based on certain fact-dependant grounds. For example, the premium or rate offered under one swap transaction became more lucrative as a result of another swap being entered into. The parties also agreed on the telephone that some of the trades were to comprise single contracts, and some of the transactions were documented using a single confirmation.

Vestia's ability to enter into the Master Agreement itself was not in dispute. Rather, capacity issues arose around individual derivatives entered into after the Master Agreement was signed. Representations given in section 3(a) of the Master Agreement and in a management certificate according to section 3(d) were of no help to Credit Suisse, because they were statements of past or present fact relating to Vestia's capacity to enter into the Master Agreement when it was signed.


The court awarded an amount of damages equal to the early termination amount. It held that the parties had intended the “Additional Representations” relating to capacity and authority in the Schedule to the Master Agreement to take effect as contractual undertakings as well as representations.

Vestia warranted that it would comply with its articles of association when it entered into future transactions under the Master Agreement. Damages were based on contractual estoppel - because Vestia had agreed to comply with its own constitutional documents, it was estopped from disputing its liability due to its lack of capacity.

The application of contractual estoppel in this case may prove controversial. A lesson to be learned from this decision is that additional representations relating to capacity in the Schedule to the Master Agreement should be scrutinised closely. If drafted in a similar way, such additional representations might provide a contractual way around capacity issues for derivative trades arising under an established master agreement.

Mr Justice Andrew Smith’s decision contains a number of contradictions. He grouped together derivative transactions on the principle that capacity cannot determined piecemeal within a single agreement, while at the same time he looked separately at whether the Master Agreement was ultra vires. He said that public authorities could not widen their capacity by giving a representation or warranty to that effect; however, due to Vestia giving such a warranty, he put Credit Suisse in the position it would have been in, if Vestia had capacity.

Could this be a poor decision? Or has contractual estoppel grown teeth? We hope to find out early next year. A hearing of appeal in the Court of Appeal is scheduled for 24 March to 24 July 2015.