The Validity of Derivatives Contracts. Legal Doctrine as a Vehicle of Dialogues on ‘Speculation’

Abstract

Derivatives contracts are essential for financial markets and are supported by market practice and regulation. And yet, courts in different jurisdictions are recurrently confronted with parties claiming their voidness or unenforceability. Although the legal doctrines in each case differ, including ‘capacity’, ‘illegality’, ‘mistake’, ‘ causa ’, and ‘object’, this paper suggests that their common denominator is the complicated relationship between law and financial ‘speculation’. Speculation is protected by regulation and respected by academic thinking. The consensus behind this support, however, results from a combination of ideas that is complex, socially controversial, and unstable. Courts are often called to arbitrate conflicts, but their role in the oversight of derivatives markets is secondary, and determining whether an individual transaction is ‘speculative’ is difficult, if not impossible. To shape the broader conflict into a constructive dialogue, courts and parties use different legal doctrines. Yet, this paper argues that not all choices are equally suitable. Using a comparative analysis of case law in the United Kingdom, Germany, Portugal, Italy and Spain, it identifies how different choices can cause discontinuities and instability, a restless status quo, or a doctrinal emergence that leads to a new equilibrium, while drawing some general conclusions about courts’ role in disputes over derivatives.