Grin and bear it. Your contract is your bond.
16 October 2017
In Secure Capital v Credit Suisse, the Court of Appeal confirmed that an investor who purchased an interest in notes issued in bearer form did not have a direct claim for breach of contract against the issuer of the notes.
Secure Capital had indirectly purchased "longevity" notes issued by Credit Suisse which were linked to life insurance policies; payment on the notes was contingent on mortality rates amongst a set of "reference lives". Secure Capital alleged that information provided in the issuance documentation was misleading.
The securities were represented by bearer notes physically held by a custodian, and it was the interests in the note which were traded through electronic book entries in the Clearstream system (a typical market arrangement). The court acknowledged that the system operates on the basis of a "no look through" principle, whereby each party has rights only against the counterparty immediately above it in the ownership chain. Save in circumstances of payment default, the contractual documents provided that only the bearer of the notes could bring a claim (the issuer being the next entity up in the chain). Secure Capital argued that a 2001 Luxembourg law nevertheless provided it with a right of action.
The court agreed with the High Court's characterisation of the issue as contractual in nature – the claim involved the assertion of contractual rights and the alleged breach of a contractual term. The existence of contractual duties and the right of the party to sue on a contract are contractual questions. The notes were governed by English law. Under English law, the issuer owed obligations to the bearer and the bearer alone. Accordingly, the court confirmed that the only party with the right to sue Credit Suisse was the custodian.
Among Secure Capital's arguments, was the suggestion that there would be a lacuna if an ultimate investor could not sue the issuer. The court maintained that there could be no such lacuna if it is precisely the consequence of the express terms of the notes and ancillary documents. It was clear that Secure Capital's case could "produce an incoherent, if not chaotic, result".
Allen & Overy acted for Credit Suisse