Deutsche Bank AG London v Comune diBusto Arsizio

Italian municipalities have general civil-law capacity. Banca Nazionale Del Lavoro S.p.A v Municipality of Cattolica (decision 8770/20) nevertheless establishes that, under the Italian law then in force, local authorities could enter only hedging, not speculative, derivatives. Its separate requirements concerning contractual validity were not capacity rules and did not apply to English-law swaps. The transactions were hedging arrangements, complied with the applicable decree, and did not create new indebtedness or significantly modify existing loans. City Council approval was therefore unnecessary; in any event, the existing Council resolution was sufficient. The swaps were valid, binding and enforceable.

Deutsche Bank sought a declaration that two English-law interest-rate swaps entered into with Comune diBusto Arsizio were binding. Busto contended that, under Italian constitutional, public-finance and local-government rules, it lacked capacity to enter the transactions because they were speculative or involved indebtedness. It also argued that approval by the City Council was required under Article 42(2)(i) of the Consolidated Code of Local Bodies and that such approval had not been given.

The court considered the effect of the Italian Supreme Court’s decision in Banca Nazionale Del Lavoro S.p.A v Municipality of Cattolica, the distinction between capacity and contractual validity, the governing law of the swaps, and contingent restitution and Article 1338 claims.

1. Disposition. Deutsche Bank’s claim succeeded. The transactions were valid, binding on Busto and enforceable according to their terms. Questions concerning the precise declarations, sums due and interest were left for consequential determination if not agreed.
2. The court could diverge from even a foreign supreme court decision, particularly in a civil-law system, but had to give that decision full and particular weight. Banca Nazionale Del Lavoro S.p.A v Municipality of Cattolica (decision 8770/20) had to be analysed issue by issue rather than accepted or rejected as a single undivided proposition.
3. Section 9 of Cattolica concerned the civil-law validity of a derivative contract, including its object and the information needed for an informed assessment of risk. It did not impose a limit on municipal capacity. Since the swaps were governed by English law, those Italian material-validity requirements did not apply. In any event, the relevant approach was case-specific and practical, and Busto had sufficient information, expertise and opportunity to understand the risks.
4. Section 8 of Cattolica represented the applicable Italian position: local authorities could enter hedging derivatives but not speculative derivatives. The Mirror Swap neutralised the risks of the earlier swap. The Cash Flow Swap reprofiled existing principal repayments and confined interest exposure within a cap and floor. The transactions were therefore hedging rather than speculative. A wider positive case based on detailed mark-to-market analysis had not been pleaded and could not fairly be advanced at trial.
5. The transactions complied with Article 3 of Ministerial Decree 389/2003. A breach of that decree would in any event be a breach of a mandatory rule, not a lack of capacity.
6. Under Article 42(2)(i) of the Consolidated Code of Local Bodies, as explained in Cattolica, City Council approval was required for swaps affecting total indebtedness, including those involving an upfront payment, extinguishment of existing loans or significant modification of them. These transactions did none of those things: principal payments netted to zero, no new indebtedness arose and the interest collar limited risk. Approval was therefore unnecessary. Alternatively, the City Council’s earlier resolution approved the relevant debt-restructuring policy and was sufficient.
7. Contingently, any breach of Article 42(2)(i) would have resulted in annullability rather than nullity; ratification would have been governed by English law and established by Busto’s conduct. The contingent restitution claim would have been governed by English law, subject to limitation, while the change-of-position case was unsupported by sufficient evidence. The Article 1338 claim would also have failed because Busto was not under an absolute duty to know the alleged invalidity and Deutsche Bank could not show reliance without fault.