Banca Intesa Sanpaolo SpA & Anor v Comune Di Venezia

An interest-rate swap entered to hedge restructured borrowing does not become speculative merely because it carries forward the negative mark-to-market exposure under an existing valid hedge. The transaction must be assessed as a whole, including the pre-existing exposure and its correlation with the underlying debt.

When determining foreign law, the court must ask what the highest relevant foreign court would decide. Lower-court decisions and domestic analogies cannot replace that inquiry. An appellate court may form its own view where the trial judge applied foreign law to facts through an evaluative exercise rather than relying on foreign-law expert evidence.

Two banks appealed against Foxton J’s decision in [2022] EWHC 2586 (Comm) that interest-rate swaps entered with Venice in 2007 were void because Venice lacked capacity under Italian law. The judge had classified the swaps as speculative and as involving prohibited indebtedness under article 119(6) of the Italian Constitution.

The swaps had restructured an existing valid hedge after the maturity of Venice’s underlying bond was extended. Their terms carried forward the existing negative mark-to-market exposure. The central issues were whether that feature made the new swaps speculative and whether novation fees paid by the banks to the former swap provider were upfront payments constituting prohibited indebtedness.

Venice cross-appealed on the governing law of its restitution claim and the banks’ change of position defence.

1. The banks’ appeal was allowed on Grounds 1 and 2. The existing Bear Stearns swap had to be treated as a valid hedging transaction. The judge’s root error was failing to incorporate that fact into his assessment of the replacement transactions. The negative mark-to-market represented an existing non-speculative exposure. Novating and restructuring the hedge did not transform that exposure into a new speculative risk: paras [156]–[168].

2. The transactions satisfied the relevant CONSOB hedging criteria. They were expressly undertaken to reduce risks connected with the restructured bond, and there was a high correlation between the derivative and the underlying debt. The notional amounts, amortisation, maturity and floating-rate receipts corresponded. The disparity between the cap and floor reflected the pre-existing exposure and did not make the swaps speculative: paras [159]–[163].

3. The correct foreign-law inquiry was what Italy’s highest relevant court would decide. Reliance on Italian lower-court decisions, without expert evidence that they demonstrated the position of the highest court, asked the wrong question. English decisions were irrelevant to that inquiry: paras [164]–[168].

4. The novation fees paid to Bear Stearns were not upfront payments within the relevant definition. They were paid by the banks on their own account as the price of assuming Bear Stearns’ position, rather than to Venice or as Venice’s agent. Even if they had been upfront payments, the hedging transactions formed an integral part of restructuring borrowing undertaken for investment expenditure and did not contravene article 119(6): paras [169]–[174].

5. The declaration that Venice lacked capacity and that the transactions were void was set aside. Venice had capacity, and the transactions remained valid and binding: para [175]. The other grounds and Venice’s cross-appeal were academic. The court nevertheless stated, obiter, that English law governed the restitution claim; pre-August 2013 payments would have been time-barred; and a change of position defence based on back-to-back hedging swaps was available in principle: paras [182]–[197].

1. Court of Appeal (Civil Division): In [2023] EWCA Civ 1482, the court unanimously allowed the banks’ appeal on Grounds 1 and 2, set aside the declaration of invalidity and held the swaps valid and binding. The remaining grounds and Venice’s cross-appeal were academic.
2. Commercial Court: Foxton J, in [2022] EWHC 2586 (Comm), held that the swaps were void for Venice’s lack of capacity, that its restitution claim was governed by English law and was not time-barred, and that the banks could in principle rely on change of position.