FML Timeline: Dexia Crediop Spa v Comune Di Prato

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In November 2002 Dexia Crediop Spa (Dexia), an Italian bank, and Comune di Prato (Prato), an Italian local authority, entered into an ISDA Master Agreement containing an English jurisdiction and governing law clause. Pursuant to this agreement the parties entered into six interest rate swaps between December 2002 and June 2006. These swaps were entered into as back-to-back transactions. From late 2010 Prato ceased making payments under the final outstanding swap. Dexia brought proceedings in England to claim the sums due.

Prato argued that it lacked the capacity to enter into the swaps under Italian law, which restricted municipalities from entering into “speculative” transactions. As such the swaps would be void under English law. Prato further argued that Article 3(3) of the Rome Convention (Article 3(3)) applied as all elements of the transaction were located within Italy. As such the agreements were subject to mandatory provisions of Italian law. As a result, Dexia’s sale of the swaps would have been in breach of mandatory Italian financial services regulations.

The Commercial Court dismissed Prato’s argument that the contract was ultra vires under English law. However it held that all elements of the transaction, other than the jurisdiction and governing law clause, were connected with Italy. In particular, Italy was where both parties were incorporated, where both parties communicated with one another, where the swap contracts were entered into and where each of the parties were obliged to perform their obligations. As such Article 3(3), and mandatory provisions of Italian law, applied.

Expert evidence provided that the financial services regulations relied on by Prato were non-derogable. As such the Court held that the swaps were void at Prato’s election. It followed that each of the parties had restitutionary claims against the other and that the net result was that Dexia owed Prato €327,680.95.

Decision

The Court of Appeal overturned a number of the Commercial Court’s findings and ordered Prato to pay Dexia €12m.

Article 3 of the Rome Convention

Article 3(3), incorporated into English law by the Contracts (Applicable Law) Act 1990, provides an exception to the general rule that parties to an agreement may elect the governing law of that contract. This exception states that where “all other elements” relevant to the situation at the time when the parties chose the governing law “are connected with one country only” the mandatory rules of the law of that country will apply.

Overturning the decision at first instance, the Court of Appeal emphasised that, in line with prior Court of Appeal authority in Banco Santander Totta SA v Companhia Carris De Ferro De Lisboa SA [2017], the test under Article 3(3) did not require that elements of the agreement were related to a particular country other than Italy. Rather, the relevant question was whether the agreement was domestic or international in nature. If elements of the agreement were international in general, but did not relate to a specific country other than Italy, this would be sufficient to avoid the effect of Article 3(3).

The Court of Appeal held that, by incorporating the ISDA Master Agreement into the swaps the agreements were inherently international. This was particularly the case because:

• the ISDA Master Agreement was agreed on the standard Multi-Currency - Cross-Border form, rather than using the less obviously international Local Currency - Single Jurisdiction form
• the agreement was signed in English despite the first language of both parties being Italian, and
• ISDA Master Agreements, being the standard form issued by the International Swap Dealers Association, are in general not associated with any country.

In combination with Dexia’s routine use of back-to-back contracts with international parties to hedge the swaps the Court of Appeal held that the use of the ISDA Master Agreement meant that Article 3(3) would not apply.

Noteworthy/ Novel points

The decision confirms that the English Courts, when asked to consider Article 3(3) in relation to financial products agreed on international standard form documentation such as an ISDA, are likely to hold that such agreements are made in an inherently international context. It therefore restores the vital certainty of derivatives having a clear, single choice of law.