UK High Court Upholds Freedom Of Contract Over Public Policy Inavlidation Of 'Anti-Deprivation' Clauses In Standard Credit Default Swap Contract

Belmont Park Investments PTY Limited (Respondent) v. BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc (Appellant), 2011 UKSC 38 (Trinity Term July 2011), is a decision by the UK's Supreme Court of England and Wales that involves two important principles of international litigation practice. The decision dismisses an appeal in the case of Perpetual Trustee Company Ltd v. BNY Corporate Trustee Services and provides an exhaustive analysis of the "anti-deprivation" rule. The decision is comprised of several decisions, long, detailed, erudite, lucid, and well-written opinions that, in the end, appear unanimously to agree on a result.

The anti-deprivation rule is aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors. Its application is one of a number of instances we have discussed in this blog concerning the limits of freedom of contract in the face of overarching public policy constraints (also see the same struggle in the state law context).

As explained by the Court, the appeal concerned the effect of the security arrangements in a complex series of credit swap transactions under which, in effect, investors gave credit protection to Lehman by reference to the performance of a basket of underlying obligations. A Lehman entity was a counterparty to a number of swap agreements made with a series of special purpose vehicles. These SPVs in turn issued notes to investors and used the funds to buy securities. There were priority provisions in the various instruments, the priority altered in the event of a default including insolvency, and the Court said that the "central issue" in the proceedings and the appeal is the validity of those provisions for alteration of priority. Lehman's creditors argued that they were being deprived of assets otherwise available in the event of insolvency. Both the High Court and the Court of Appeal found that no deprivation had occurred.

The two principles of international practice reflected in the decision are:

First, procedurally, there is an interesting use of international communication, cooperation, and comity exhibited in the decision. Litigation involving these issues was pending in many different forums, including in the UK and in the Bankruptcy Court in the Southern District of New York. As the Court explains here:

"Following communications between the High Court in...