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Commercial Court grants rescission of derivative contracts involving UBS and the Leipzig Water Company


The Commercial Court has handed down judgment in UBS AG v. Kommunale Wasserwerke Leipzig Gmbh (“KWL”), a US $340 million claim arising out of the sale by UBS to KWL of four highly complex derivatives known as “STCDOs”.

KWL is the municipal water company for the City of Leipzig. Between 2006 and 2007 KWL entered into four STCDOs either directly with UBS or indirectly via two other intermediary banks (Depfa Bank and Landesbank Baden-Württemberg or “LBBW”). The STCDOs, which each consisted of a synthetic portfolio of credit default swaps on which KWL “sold” credit protection to UBS in exchange for payment of a “premium”, had a notional value of over US$400 million. The portfolios were managed by UBS’s asset management arm, UBS Global Asset Management or “UBS GAM”.

After the STCDOs sustained catastrophic losses in the wake of the 2007-2009 financial crisis, it emerged that the sale of the STCDOs had been procured by substantial bribes paid by KWL’s financial advisers (Value Partners) to KWL’s then managing director.

UBS sought to enforce each of the STCDOs against KWL and the intermediary banks.

Following a 14 week trial, Mr. Justice Males dismissed UBS’s claims against KWL and granted KWL’s claim for rescission, on the grounds that:

  1. Although this was done without UBS’s knowledge, Value Partners acted as agent for UBS in paying the bribes to KWL and;
  1. UBS were aware that Value Partners were acting under an undisclosed conflict of interest in seeking to advance their relationship with UBS at KWL’s expense.

The Judge held that rescission of the STCDOs was subject to repayment of c.US$35 million of the premium originally paid by UBS, and that CDS contracts entered into with the STCDOs had to be rescinded with them such that KWL was not able to claim US$70 in early termination payments under those CDSs. KWL had further argued that UBS had made fraudulent misrepresentations relating to the STCDOs, and that KWL did not have capacity to enter into the STCDOs under German law. These defences were dismissed. 

UBS’s claims against the intermediary banks were also dismissed, on the grounds that the intermediary banks had been induced to enter into the transactions by UBS’s fraudulent misrepresentations. 

Mr. Justice Males also found that that:

  1. All the losses that KWL sustained under the STCDOs were caused by UBS GAM’s negligent portfolio management and KWL would therefore have been entitled to recover these losses as damages from UBS GAM if the STCDOs had not been rescinded.
  1. KWL had made fraudulent misrepresentations to UBS relating to the STCDOs, but that this had not been the cause of any loss to UBS.

The judgment is here.

Members of Brick Court Chambers acted for both KWL and UBS in the dispute:

KWL was represented by Tim Lord QC, Simon Salzedo QC, Stephen Midwinter and Craig Morrison, instructed by Addleshaw Goddard LLP.

UBS was represented by Richard Slade QC, Jonathan Dawid and Edward Harrison, instructed by Mayer Brown LLP.