Publication: Working Paper Series No. 153

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“The Validity of Derivatives Contracts. Legal Doctrine as a Vehicle of Dialogues over ‘Speculation’” by David Ramos Muñoz (Charles III University of Madrid) was published on 1 September 2023 in the EBI Working Paper Series No. 153.

Derivatives contracts are essential for financial markets, and supported by market practice and regulation. And yet, courts in different jurisdictions are recurringly confronted with cases where the claim is that derivatives are ‘void’ or unenforceable. Legal doctrines used in such cases can differ, including ‘capacity’, ‘illegality’, ‘mistake’, ‘causa’ or ‘object’. Yet, this paper suggests that their common denominator is the complex relationship between law and financial ‘speculation’. Whereas speculation has achieved respectability in academia and regulation, this is the result of a complex, shifting and controversial balance of ideas. Courts are often called to arbitrate a conflict with wider ramifications, despite lacking major responsibilities over derivatives supervision. They use legal doctrines to shape the broader conflict into a constructive dialogue, and to accommodate competing interests while preserving legal consistency. The choice of doctrine can decisively influence the outcome, and the impact in the market and the legal system. The paper provides a general framework, and uses a comparative analysis of case law in the United Kingdom, Germany, Portugal, Italy and Spain to identify suitable and riskier doctrinal choices, while drawing some general conclusions about the meaning of derivatives’ adjudication and courts’ role in it.

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