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01 Dec 2017

Court of Appeal rules investor has no contractual right of action against issuer in respect of bearer notes


The Court of Appeal has ruled that an investor with an interest in promissory Notes does not have a direct claim against the issuer for breach of contract in respect of allegedly misleading statements made in the issuance documentation.

Secure Capital argued that Luxembourg law, the law of the relevant trading system, applied entitling them to pursue a direct claim against Credit Suisse as issuer of the Notes.


The Notes were issued in bearer form in 2008 by Credit Suisse. The bearer of the Notes was Bank of New York Mellon (BNYM) holding them on behalf of Clearstream, an electronic trading system for interests in securities established in Luxembourg and operating under Luxembourg law. Secure Capital was the account owner, with RBS Global Banking (Luxembourg) SA (RBSL) the account holder.

The Notes were linked to life insurance policies and payment on the Notes was contingent on mortality rates amongst a set of 'reference lives' to which the relevant life insurance policies related.

Secure Capital claimed Credit Suisse knew or ought to have known that information provided in the issuance documentation was misleading because mortality tables used to generate the expected life expectancies were shortly due to be updated, the result of which would render the Notes effectively worthless.

The Notes were subject to a set of conditions, which included the Programme Memorandum, the Product Supplement and the Pricing Supplement.

The Pricing Supplement contained a term that the issuing bank, Credit Suisse, had “taken all reasonable care to ensure that the information contained in this Pricing Supplement when taken together with the other Issue Documentation is true and accurate in all material respects and that…there are no other material facts the omission of which makes misleading any statements herein…

The Programme Memorandum determined that the bearer would be deemed to be the absolute owner of the Notes; that the securities were governed by English law with the issuer agreeing to the jurisdiction of the English courts; and that rights of third parties to enforce any terms of the conditions were expressly excluded.

Further, the Clearstream system operated on the basis of a 'no look through' principle, whereby each party has rights only against their own counterparty.

At first instance

Secure Capital’s claim was for damages for breach of contract. It sought to rely on a 2001 Luxembourg law on the Circulation of Securities (the 2001 Law) (Luxembourg law being the law under which Clearstream operated), which it said entitled account owners to exercise certain rights attached to the Notes, including to bring proceedings against the issuer for a breach of a term of the Notes. 

Credit Suisse defended the claim on the basis that Secure Capital had no contractual relationship with it; that the applicable law was English law and that the 2001 Law was therefore irrelevant.

At first instance, Hamblen J identified the “fundamental issue” as the question of which was the applicable law. Following Raiffeisen Zantralbank Osterreich v Five Star Trading [2001] QB 825 he saw the decision as involving a three stage test:

  1. Characterisation of the relevant issue;
  2. Selection of the rule of conflict of laws which lays down a connecting factor for that issue; and
  3. Identification of the system of law which is tied by that connecting factor to that issue.

The judge found the relevant issue to be whether Secure Capital could claim damages for breach of contract in respect of the allegedly misleading statement. That was to be decided according to English law – as the proper law of the contract. The judge noted that, however the issue was characterised, “given that it involves the enforcement of rights against Credit Suisse under Notes governed by English law it is difficult to see how the appropriate law can be other than English law.

Under English law, Credit Suisse’s obligations were owed only to BNYM as bearer and there was no scope in this contractual analysis for the introduction of foreign law: “A foreign law cannot (even if it purported to do so) create new contractual obligations in an English law contract.” As such, the 2001 Law was irrelevant and could not give Secure Capital a cause of action against Credit Suisse.

On appeal

On appeal, Secure Capital contended that the judge at first instance had been wrong to characterise the issue as contractual, asserting instead that the relevant issue was who is entitled to sue on a bearer note which is held in an immobilised settlement system – a question which Secure Capital said should be answered by reference to a new conflicts rule which identifies the law of the settlement system as the applicable law (here, Luxembourg law).

In support of its arguments, Secure Capital asserted that Hamblen J’s findings would effectively create a lacuna, where the only person who would have standing to assert the current claim was the bearer who had suffered no loss.

The Court of Appeal found that the question of who could sue on a contract was to be determined by the proper law of the contract. Here, the terms of the Notes made clear that was English law.

On the question of whether there existed a lacuna that needed judicial intervention to close, David Richards LJ was clear that Secure Capital had found a 'problem' that the market did not consider needed fixing and that their submission that their proposed approach "accorded with commercial reality and expectation" was "unsupported". On the contrary, he noted that the purpose of immobilised securities was to "prevent a direct link between investors and the issuer".

One final point worth noting – Secure Capital’s claim was advanced in contract only and it remains to be seen how, for example, a tortious claim would have fared.



Kate Cordery

Kate Cordery

T:  +44 20 7809 2397 M:  Email Kate | Vcard Office:  London

Sue Millar

Sue Millar

T:  + 44 20 7809 2329 M:  + 44 7825 625 898 Email Sue | Vcard Office:  London