Deutsche Bank AG London & Anor v Provincia Di Brescia

For private international law purposes, “capacity” has an internationalist meaning encompassing a corporation’s substantive power to enter into a contract. That issue is governed by the law under which the corporation was created, while the contractual consequences of incapacity are governed by the putative applicable law of the contract.

Issues of authority, ratification and material validity are distinct. For English-law transactions, ostensible authority and ratification are governed by English law, and mandatory rules of a foreign system do not generally displace the parties’ choice of English law where the requirements of the Rome Convention are not met.

Plain-vanilla interest-rate collar swaps entered into to hedge corresponding borrowing are not speculative where the transaction reduces the risk of existing exposure and has a high degree of correlation with it.

Deutsche Bank AG London and Dexia SA sought declarations concerning two English-law interest-rate swap transactions entered into with Provincia di Brescia in 2006 and two Italian-law settlement agreements concluded in 2017.

Brescia had challenged the Court’s jurisdiction over aspects of the claims but, after those challenges failed, did not participate in the trial. The claims concerned whether the transactions were invalid or unenforceable under Italian law for want of capacity, authority or compliance with mandatory rules, and whether the settlement agreements prevented Brescia from pursuing related proceedings in Italy.

The Court had jurisdiction over the claims and was required to determine the effect of the Italian-law arguments on the transactions and settlement agreements.

1. Proceeding in Brescia’s absence. The Court exercised its discretion under CPR 39.3 to proceed. Brescia had been served with the relevant documents, retained solicitors on the record, and its non-attendance was deliberate. The Banks nevertheless had to prove their case on the balance of probabilities and owed an obligation of fair presentation, including drawing attention to points potentially favourable to Brescia.
2. Characterisation and applicable law. Capacity has a broad internationalist meaning, including the legal ability or substantive power of a foreign corporation to enter into a contract. The issue of capacity was governed by Italian law, but the contractual consequence of incapacity was governed by English law. Authority, ratification and material validity were separate questions. The authority and ratification issues concerning the English-law transactions were governed by English law.
3. Capacity and speculation. The transactions were hedging transactions, not speculative transactions. Applying the two-limb CONSOB test, they were entered into to reduce the risk of existing borrowing and had a high degree of correlation with the bonds as to notional amount, maturity and cashflows. Assessment was ex ante. A negative initial mark-to-market did not make the transactions speculative.
4. Indebtedness and Article 42 of TUEL. The transactions did not involve indebtedness otherwise than for investment purposes. The Court did not finally determine whether the Indebtedness Limit could apply more broadly to a derivative forming part of a refinancing, because the transactions were connected with refinancing that involved no additional resources and the new borrowing funded identified investments. Provincial Council approval was either unnecessary or, if required, had been obtained. In any event, Dr Fenaroli had ostensible authority and Brescia had repeatedly ratified the transactions by payment and budgetary approvals.
5. Material validity. Arguments based on Article 41, Decree 389, alleged pre-contractual failures, withdrawal information, the Italian Civil Code provisions on mandate, and the alleged failure to transmit contracts to the MEF concerned validity, enforcement or conditions precedent, not capacity. They therefore did not affect the validity or enforceability of the English-law transactions. Article 3(3) of the Rome Convention did not apply because the relevant elements were not connected solely with Italy.
6. Settlement agreements. The English jurisdiction clauses in the Master Agreements covered disputes concerning the transactions, including declarations concerning the Italian-law settlement agreements. The settlement agreements were conservative settlements, created no new multi-year expenditure, and did not require Provincial Council approval. They were not void under Article 1972 of the Italian Civil Code, and Dexia had given consideration through mutual concessions, including waiving claims and costs. Any want of approval was in any event ratified by Brescia’s conduct.
7. Relief. Subject to the stated reservations and withdrawals of certain declarations, the Court granted the substantive declarations concerning the validity and enforceability of the transactions and settlement agreements. It also declared that Brescia’s New Italian Proceedings breached the settlement agreements and that the Banks were entitled to damages and contractual indemnities for enforcement and protection costs.

This was a first-instance decision. The judgment records earlier jurisdiction decisions concerning the same claims at [2022] EWHC 2859 (Comm) and [2023] EWHC 959 (Comm), but no appeal from the present judgment.