Dexia Crediop S.P.A. v Comune Di Prato

A party cannot generally raise an unpleaded contention that foreign law governs a claim, particularly where foreign law must be pleaded as fact. A restitutionary cause of action arising from contractual invalidity accrues when the contractual right to treat the transaction as void is exercised. A change-of-position defence requires a causal connection between the receipt and the defendant’s altered position; ordinary expenditure incurred in any event is insufficient.

For a retail investor, regulatory disclosure duties require adequate information about the nature, risks and implications of the transaction. They do not automatically require disclosure of an initial negative mark-to-market value or alleged implicit costs. Where a financial intermediary acts as a direct counterparty, a conflict of interest does not arise merely from that fact.

The claimant sought restitution of net payments made under interest-rate swaps which had been held invalid in the main claim judgment. The defendant pursued a restitution counterclaim for sums paid under another swap, together with regulatory, advisory and misrepresentation counterclaims and related defences.

The court considered the proper law of the restitution claims, limitation, change of position, Italian financial-services and civil-law requirements, disclosure of initial mark-to-market values, suitability, conflicts of interest, the right of withdrawal, causation and damages. The judgment also addressed the effect of a 2002 advisory agreement.

1. Outcome. Dexia’s alternative restitution claim succeeded. Prato’s restitution counterclaim succeeded. The claims were capable of set-off, and the court indicated that the net balance would likely be payable by Dexia to Prato. The regulatory counterclaim succeeded only in establishing a breach of the duty to explain the seven-day withdrawal right; that breach caused no loss. The advisory and misrepresentation counterclaims and the remaining defences failed.
2. Pleading and choice of law. In private-law proceedings the parties generally define the issues by their statements of case. A party seeking to rely on foreign law must ordinarily plead that contention. The fact that the point is characterised as a question of law does not dispense with pleading. The court therefore applied English law to Dexia’s restitution claim because Prato had not pleaded that Italian law governed it. Even assuming the Italian-law objection were available, the absence of satisfactory evidence of foreign law would not necessarily defeat the claim, since English law may be applied under Rule 25(2) of Dicey.
3. Limitation. A restitution claim arising from invalidity under article 30 TUF did not accrue until Prato exercised its right to treat the swaps as void. The claim was therefore brought within time. Alternatively, the mistake exception in s 32 of the Limitation Act 1980 would have postponed limitation because reasonable diligence would not have revealed, before 7 December 2004, that the better view of Italian law invalidated the swaps.
4. Change of position. The defendant must establish a causal connection between receipt and the asserted change of position. The wider approach does not remove that requirement. Interest payments which would have been made in any event did not qualify. The evidence did not show that the swap receipts affected Prato’s budgeting or expenditure, and the defence failed.
5. Italian financial-services law. The swaps were invalid under the applicable distance-contract and form requirements in articles 30 and 32 TUF, article 23.1 TUF and article 30 CR. The relevant contractual information requirements protected retail investors even where an internationally standardised ISDA form was used. The court rejected the arguments that the provisions were unnecessary for swaps or that the advisory agreement supplied the required information.
6. Causa and oggetto. The court rejected the arguments that non-disclosure of initial MTM, speculative purpose, or the alleged discretion over termination costs deprived the swaps of causa or oggetto. The cause of a hedging swap lay in the exchange of the relevant cash flows, and the contractual mechanism did not confer an unfettered discretion to determine payment amounts.
7. Disclosure and conflicts. Article 28.2 CR required information needed to enable a retail investor to make informed investment and disinvestment decisions. The evidence did not establish that initial MTM or implicit costs affected the risk assumed or were information required by that provision. A direct counterparty relationship did not itself establish a conflict under articles 21 TUF and 27 CR; an ulterior or different motive was required. No such motive was shown.
8. Damages. A breach of the withdrawal-right requirement did not dispense with proof of causation. There was no evidence that Prato would have withdrawn had it been informed of the right. The breach consequently caused no loss and attracted no damages.