Banca Intesa Sanpaolo Spa & Anor. v Comune Di Venezia

Under English conflicts rules, a legal person’s capacity to enter an English-law contract is governed by the law of its incorporation. A foreign restriction on the substantive power to enter a particular type of transaction may therefore make the transaction void, even where the foreign law describes the restriction as illegality.

The Italian Supreme Court’s decision in BNL v Cattolica was accepted as establishing that, during the relevant period, Italian local authorities lacked capacity to enter speculative derivatives and derivatives involving indebtedness other than for investment expenditure. The transactions were predominantly speculative and included an embedded upfront payment. They were consequently void under English law. Contractual representations could not enlarge Venice’s capacity, although the Banks could rely in principle on change of position in relation to back-to-back hedges.

Two Italian banks sought declarations that interest rate swaps entered into with the Municipality of Venice under 1992 ISDA Master Agreements were valid and binding. Venice sought declarations of invalidity and restitution of payments, alternatively damages and other relief.

The swaps restructured an earlier Bear Stearns swap and were connected with the restructuring of a municipal bond. The issues included Venice’s capacity under Italian law, the authority of its officers, the effect of the Italian Supreme Court’s decision in BNL v Cattolica, the Rome Convention, contractual estoppel, restitution, change of position, limitation, and alleged advisory duties. The claim was determined at first instance.

1. Disposition. The transactions were void and unenforceable because Venice lacked capacity to enter them. Venice’s alternative damages claim failed. The Banks’ contractual, estoppel, misrepresentation, indemnity and Italian-law claims failed. Venice was entitled in principle to restitution, subject to the Banks’ change-of-position defence.
2. Capacity and foreign law. Under English conflicts rules, capacity meant the legal ability or substantive power of a corporation to enter a contract of the relevant type. The court had to characterise the issue under English law, but ascertain the content of Italian law as it stood when the transactions were made. A decision of the highest foreign court could be rejected only on a compelling evidential basis. The decision in BNL v Cattolica was therefore accepted as the current statement of Italian law, despite its significant departure from the earlier understanding.
3. Speculation and indebtedness. Cattolica established that a local authority could have capacity to enter a hedging derivative but not a speculative derivative. The court declined to formulate a rigid definition of speculation. Relevant indicators included the relationship between the derivative and the underlying debt, the unequal values of the cap and floor, lack of alignment with the forward rate curve, assumption of a new risk, and using the transaction to address a past negative mark-to-market. The transactions were predominantly speculative.
4. The Banks’ payment of approximately €8 million to terminate the Bear Stearns swap, embedded in the new terms, was an upfront for Italian-law purposes. It created indebtedness not incurred to finance investment expenditure. Venice therefore lacked capacity under Article 119(6) of the Italian Constitution.
5. Authority. The City Council’s approval was insufficient under Article 42(2)(i) of TUEL because Resolution 129 merely supplied guidance and did not approve the upfront or its amount. However, Article 42(2)(i) and Article 192 concerned authority and attribution rather than Venice’s substantive capacity. Mr Dei Rossi lacked actual authority, but had ostensible authority. Venice had also ratified the transactions by performance, accounting treatment and continued approval of its financial statements.
6. Other issues. Article 3(3) of the Rome Convention was not engaged because the transactions had material international elements, including standard ISDA documentation and objectively foreseeable non-Italian hedging arrangements. The court did not finally determine the separate argument concerning the mandatory status of Articles 1322 and 1325 of the Italian Civil Code.
7. Restitution and limitation. The restitutionary claim was governed by English law. A change-of-position defence was available in principle where the Banks had entered back-to-back hedges in anticipatory reliance on receiving payments under the transactions. The defence required later quantification. Venice’s restitution claims were not time-barred because it could not reasonably have discovered a worthwhile claim before Cattolica.