Banco Santander Totta SA v Companhia Carris De Ferro De Lisboa SA & Ors

Article 3(3) of the Rome Convention is a limited exception to the fundamental principle that contracting parties may choose the applicable law. It must therefore be construed narrowly. The question is whether, apart from the choice of law, the situation was purely domestic.

Elements relevant to that inquiry are not confined to connections with a particular national legal system under traditional conflict-of-laws principles. They may include features which objectively point from a purely domestic situation towards an international one.

A national rule may be non-derogable where it retains an irreducible mandatory core which the parties cannot exclude in advance. An agreement made after rights have arisen merely to waive their enforcement does not establish that the underlying rule was derogable when the contract was made.

Seven long-term interest-rate swaps were made between a Portuguese bank and Portuguese public-sector transport companies using ISDA Master Agreements governed by English law. Following sustained low interest rates, the companies ceased making payments. The bank sought declarations and payment, while the companies relied on Portuguese law to resist enforcement.

Blair J declared that the obligations were valid, binding and enforceable. He held that Article 3(3) of the Convention on the Law Applicable to Contractual Obligations 1980 did not preserve Portuguese mandatory rules because the situation contained international elements. He also held that Article 437 of the Portuguese Civil Code was derogable because rights arising under it could be waived after the event.

The appeal concerned whether Article 3(3) was confined to factors connecting a contract with another national legal system, whether the judge had properly evaluated the international elements, and, contingently, whether Article 437 was non-derogable.

1. The appeal was dismissed. Article 3(3) of the Rome Convention did not apply because the circumstances relevant to the swaps were not connected with Portugal alone. The contracts formed part of an objectively international situation.

2. Party autonomy under Article 3(1) is the fundamental principle and starting point of the Convention. It also promotes legal certainty. Article 3(3), which preserves the non-derogable rules of the single country with which all other relevant elements are connected, is a limited exception and must be construed narrowly. This approach was supported by United Antwerp Maritime Agencies (Unamar) NV v Navigation Maritime Bulgare and Republik Griechenland v Nikiforidis.

3. The expression “elements relevant to the situation” is wider than elements relevant to the contract and is not confined to factors which connect the contract with a particular country under traditional conflict-of-laws principles. Had that narrower meaning been intended, Article 3(3) could have used the language of “close connection” found in Article 4. The operative question was whether the situation was purely domestic. To the extent that Dexia Crediop SpA v Comune di Prato [2015] EWHC 1746 (Comm) adopted the narrower construction, the court disagreed with it.

4. The first-instance judge had undertaken an evaluative assessment of the relevant elements. An appellate court should interfere only for an error of principle or where the assessment was plainly wrong, with particular caution where the decision came from an expert specialist court. The assignment provision, cross-border ISDA documentation, international derivatives market, foreseeable back-to-back hedging and operational reliance on a Spanish group company were properly considered. No error of principle or plainly wrong evaluation was shown.

5. The Article 437 issue did not arise and the Master of the Rolls addressed it only because it had been fully argued. A rule may be non-derogable under Article 3(3) where it has an irreducible core which the parties cannot exclude in advance, even though they can allocate identified risks. A waiver made after the relevant event is merely a refusal to enforce accrued rights, not a contractual disapplication of the rule. Article 437 would therefore have applied had the situation been purely domestic, and its substantive conditions had been found satisfied.

6. Longmore LJ agreed that the appeal should be dismissed but considered the non-derogability issue unsuitable for final determination because it was unnecessary to the result. Sir Martin Moore-Bick agreed that the appeal should be dismissed for the reasons given by the Master of the Rolls. A reference to the CJEU was refused because the proper interpretation of Article 3(3) was clear.

1. Court of Appeal (Civil Division): Dismissed the transport companies’ appeal and upheld the declarations that their obligations under the swaps were legal, valid, binding and enforceable.

2. High Court, Queen’s Bench Division, Commercial Court: Blair J rejected the defences and, by an order dated 24 March 2016, declared the obligations enforceable according to the swaps’ terms. The neutral citation of that judgment is not stated in this judgment.