Dexia SA v Regione Emilia Romagna

A court may proceed with an undefended trial where the defendant has knowingly and voluntarily waived participation and an adjournment would be pointless. The claimant must nevertheless prove its case on the balance of probabilities, and must fairly draw attention to points that may assist the absent defendant.

For an English-law derivative entered into by an Italian public authority, Italian law may determine substantive capacity, but authority, ratification and material contractual validity are generally governed by the chosen English law. A plain vanilla hedging derivative is not speculative where it reduces the risk of an existing liability and has a high degree of correlation with that liability. A derivative does not constitute indebtedness merely because it has a negative initial mark-to-market, absent an upfront payment or material alteration or extinction of the underlying debt.

Dexia sought declarations concerning an interest-rate swap entered into with Regione Emilia Romagna in 2004 to hedge a long-term floating-rate loan. The transaction was governed by English law and subject to an exclusive English jurisdiction clause.

After acknowledging service and indicating an intention to challenge jurisdiction, the Region ceased participating. It brought related proceedings in Italy alleging that the transaction was speculative, involved unauthorised indebtedness, lacked proper approval, and breached Italian financial-services and mandatory-law requirements.

The Commercial Court had to determine whether it could proceed in the Region’s absence, whether the transaction was valid and enforceable, whether the Italian-law objections affected capacity or validity, and whether Dexia was entitled to declaratory, damages and indemnity relief.

1. Uncontested trial. The Court proceeded in the Region’s absence. The Region had been served with the relevant documents, retained solicitors on the record, and had deliberately chosen not to participate. Its right to attend and be represented was waived, and an adjournment would have been pointless. The Court nevertheless required Dexia to prove its case on the balance of probabilities and to present fairly matters potentially assisting the absent defendant.
2. Characterisation and applicable law. Capacity is characterised under English law but, in the case of a foreign public entity, substantive power to enter the contract is determined by the entity’s law. The civil-law consequences of incapacity are governed by the putative applicable contractual law. Authority, ostensible authority and ratification were governed by English law. Italian material-validity rules did not displace the parties’ choice of English law.
3. Capacity and speculation. The applicable test required the derivative to be entered into expressly to reduce the risk of an existing position and to have a high degree of correlation with the hedged exposure. The transaction satisfied both limbs. Its negative initial mark-to-market, absence of an upfront payment, and later minor cash-flow discrepancies did not make it speculative. The assessment was made ex ante.
4. Indebtedness. The transaction did not fall within the concept of indebtedness under Article 119(6) of the Italian Constitution. It involved no upfront payment, did not extinguish or materially modify the underlying loan, and was a straightforward interest-rate hedge.
5. Authority and ratification. The Region’s own legislation authorised the Regional Board to use derivatives and transform interest rates. The relevant officer therefore had actual authority. In any event, the Region held him out as authorised and repeatedly ratified the transaction through performance, payments, budgets and financial statements.
6. Mandatory-law arguments. The transaction complied with the relevant Italian-law requirements. The Region was a professional investor under Article 31 of the Consob Regulation. The transaction did not breach Article 41, Decree 389, Articles 21, 23 or 26 of the relevant financial-services legislation, or Article 1337 of the Italian Civil Code. Article 3(3) of the Rome Convention did not apply because the transaction had substantial cross-border elements.
7. Relief. The Court granted the declarations in Annex 3. The Italian proceedings breached the exclusive English jurisdiction clause. Dexia was also entitled to the contractual indemnity and damages declarations, including in respect of reasonable legal costs.