Agency, Effect Of A Bribe On The Enforceability Of A Contract By A Third Party, And The Effect Of A Conflict Of Interest

UBS AG (London Branch) and another v. Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567

Kommunale Wasserwerke Leipzig GmbH (KWL) is the municipal water company of Leipzig. It was run at all relevant times by two individuals, Mr Heininger and Dr Schirmer. They became involved with two corrupt financial advisers acting through a Swiss company called Value Partners. As part of a restructuring of cross-border leasing arrangements, Value Partners induced KWL to enter into four single tranche collateralised debt obligations (STCDOs), all of which, in commercial terms, ultimately had UBS as their counterparty. Three of the STCDOs, however, were concluded with an intermediary procured by UBS (either Depfa Bank plc (Depfa) or Landesbank Baden-Württemberg (LBBW)), such that there was a "front swap" between KWL and Depfa/LBBW, and a "back swap" between Depfa/LBBW and UBS. Pursuant to the STCDOs, KWL sold credit protection in relation to a basket of reference entities either directly to UBS, or to Depfa/KWL who in turn sold it on to UBS for a relatively small intermediation fee. In exchange, UBS sold KWL credit protection in relation to the four institutions referred to as part of the cross-border leasing arrangements above.

The commercial outcome of the STCDOs was to release substantial sums to KWL in the form of premium payments (a net total of USD28.1 million plus €6.4 million), but expose KWL to a potentially massive liability if the reference entities underlying the STCDOs defaulted, as a number duly did during the financial crisis.

Underlying these complex transactions was a fraud on KWL, orchestrated by Value Partners. Value Partners succeeded in extracting almost the whole premium paid to KWL under the STCDOs, and bought Mr Heininger's complicity through...