Dexia Crediop SPA v Comune Di Prato

Foreign law is ordinarily a question of fact, so an appellate court will usually be slow to disturb a trial judge’s evaluation of expert evidence. The court may, however, form its own view where the issue substantially calls for legal judgment.

For article 3(3) of the Rome Convention, standard international ISDA documentation and routine back-to-back hedging arrangements were relevant international elements. The swaps were therefore not purely domestic Italian contracts and Italian mandatory financial rules did not displace the parties’ choice of English law.

A local authority swap was not “indebtedness” within article 119 of the Italian Constitution. Article 41.2 of Law 448/2001 applied only to refinancing involving new debt. A damages claim for failure to state a statutory withdrawal right also required proof that the omission caused loss.

Dexia Crediop SPA, an Italian bank, entered a series of interest-rate swaps with Comune Di Prato, an Italian local authority, under an ISDA Master Agreement governed by English law. Swap 6 replaced the earlier swaps as part of a debt restructuring.

Walker J held that Prato had capacity under Italian local-government law, but that article 3(3) of the Rome Convention engaged mandatory Italian rules. He therefore held that article 30 of the Testo Unico della Finanza invalidated the swaps because they lacked a seven-day withdrawal provision. His later judgment dealt with other regulatory defences, restitution and counterclaims.

Dexia appealed. Prato cross-appealed on capacity, regulatory and damages issues. The central question was whether the contracts were sufficiently international for article 3(3) to leave the parties’ English-law choice effective.

1. Appeal allowed and cross-appeal dismissed. The court entered judgment for Dexia for the principal sum of €12,017,611.55, subject to assessment of interest. Prato’s counterclaims and both parties’ restitutionary claims failed.

2. The court upheld Walker J’s rejection of the capacity defences. The swaps were not a resort to “indebtedness” within article 119(VI) of the Italian Constitution, read with paragraph 17 of article 3 of Law 350/2003. The Court of Appeal of Bologna’s reasoning in Municipality of C was unpersuasive and did not show that the highest Italian court would hold otherwise.

3. Article 41.2 of Law 448/2001 imposed its financial-advantage requirement only where refinancing involved new debt. Swap 6 involved no new debt. The court further concluded, obiter, that initial mark-to-market value was not an effective cost in assessing financial advantage.

4. Walker J had adopted too narrow a construction of article 3(3) of the Rome Convention. Applying Banco Santander Totta S.A. v Compania Carris, the relevant elements were not confined to links with a particular foreign country. The multi-currency cross-border ISDA form, the routine hedging swaps with non-Italian banks, and the international swaps market made the transaction international. Article 3(3) did not therefore apply, and the Italian mandatory financial rules could not invalidate the swaps.

5. The court nevertheless addressed the alternative arguments. If article 3(3) had applied, article 30.6 and 30.7 TUF would have made the absence of a seven-day withdrawal term effective at Prato’s option, irrespective of a factual inquiry into who initiated the transaction. Article 32 TUF did not apply because the transaction involved direct physical meetings and was not distance marketing. The formal requirements relied on under article 23.1 TUF and article 30 CR did not require the impossible specification of procedures or documents which did not exist.

6. Prato’s statutory-tort claim failed for want of causation. It had not shown that it would have withdrawn from the swaps had the statutory right been stated. English law could not award damages equivalent to nullity where English law, as the chosen law, governed the contracts’ validity.

• Court of Appeal (Civil Division): allowed Dexia’s appeal and dismissed Prato’s cross-appeal: [2017] EWCA Civ 428.
• High Court, Commercial Court: Walker J held that Prato had capacity but that article 3(3) of the Rome Convention engaged mandatory Italian law. His first judgment is reported at [2015] EWHC 1746 (Comm); the later judgment determined further defences, restitution and counterclaims.