- Court Finds Swap Agreement and Underlying Lease Agreement Are Not Severable
- June 26, 2015
- Law Firm: Jones Day - Cleveland Office
- In a decision dated January 20, 2015, the Paris Court of Appeal confirmed an earlier decision held by a lower court in a case involving a floating rate lease agreement and a swap contract.
Both agreements were proposed by the same bank. The swap agreement was designed to cover the interest rate risk arising from the floating rate lease agreement.
The borrower agreed to both agreements and proceeded with the performance of the swap agreement. The borrower had given its preliminary consent to the agreement but never gave the required notarized consent.
The borrower then refused to make the payments due under the swap agreement on the ground that the swap agreement was null and void due to the absence of consideration (cause) as a result of the invalidity of the lease agreement. The bank required performance of the swap agreement on the ground that the swap agreement was severable from the lease agreement.
On these two issues, the Paris Court of Appeal confirmed the decision held by the lower court. The Court of Appeal confirmed that the requirement for the swap agreement to have proper consideration (cause) is to be assessed at the time of entry into that the swap agreement. At the time of entry into the swap agreement, consideration did exist due to the existence of the lease agreement. The Paris Court of Appeal further confirmed that the swap agreement was not severable from the lease agreement; the lower court rightly noted that the borrower was offered the choice between a fixed rate lease and a floating rate lease, and in the latter case, a swap agreement was offered and agreed to and the notional amount of the swap agreement was the same as the amount due under the lease. As a result of the two agreements not being severable, the swap agreement became invalid like the lease agreement.