On 18 January the Supreme Court closed the curtain on the long-running Dexia Crediop SpA v Comune di Prato saga. The Court refused leave for the municipality (Prato) to appeal the 15 June 2017 Court of Appeal decision in Dexia’s favour. The case became something of a cause celebre when an earlier decision by the High Court threatened to privilege the application of local law over the choice of English law specified in the parties’ ISDA. . The decision should be read with Court of Appeal decision in Banco Santander Totta SA v Companhia Carris de Ferro de Lisboa SA & Ors; the inevitable conclusion is that succesful English court challenges to choice of law are a near-extinct species.
Prato had sought to use local Italian laws to invalidate a series of six swaps and collars, an approach that found favour in the High Court in 2015, who deemed the trades to be null and void. The decision cause raised eyebrows (if not alarm) among the derivatives community, implying that local law agreements should be privileged
In 2002 Dexia and Prato signed a 1992 ISDA Master Agreement, containing the usual English law and jurisdiction clause. The parties entered into a series of six transactions, one of which was subsequently restructured in 2006. Prato became liable for payments under the swap in 2009 and made two payments thereunder. In December 2010 Prato declared the resolution to enter the swap as null and void, by virtue of being ultra vires and ceased payment to Dexia, who then proceeded to make a claim in the High Court.
In this initial case, Walker J found that Article 3(3) of the Rome Convention was applicable. As a brief reminder- Article 3 asserts the primacy of law chosen by contracting parties over applicable national law. It is qualified by 3(3) which effectively overrides chosen law if the transaction is connected to one country only and that country’s mandatory national rules are applicable. Walker J considered the following elements to establish the pre-emptive Italian connection:
- the trades were transacted in Italy
- relevant communication between the parties took place in Italy
- Dexia was under the jurisdiction of the Bank of Italy
- the obligations conferred by the swaps were to be performed in Italy
The judge further opined that neither the use of an ISDA Master Agreement, nor the existence of back-to-back transactions with “foreign” counterparties were relevant to his determination. This finding allowed for the application of Article 30 of the Testo Unico della Finanza, invalidating “off-site” contracts which do not allow for a seven day right of withdrawal.
Court of Appeal
On appeal the higher court reversed the High Court’s decision, affirming the Banco Santander precedent that Article 3(3) of the Rome Convention will only apply in a “purely domestic” situation. The Court found that the existence of back-to-back transactions and the fact of the transaction being governed by an ISDA Master Agreement precluded the application of Article 3(3). The Court went further to note that the back-to-back element was “highly significant” insofar as the risk security they confer may “quickly become illusory” if local laws were allowed primacy over the conctractual choice.
The Court of Appeal’s decision represented welcome (possibly rare) clarity, consistency and certainty with respect to this commercially consequential clause. Even in cases where two foreign counterparties transact in a foreign land, English courts will privilege the parties’ chosen English governing law- “once an international element comes into the picture, Article 3(3) with its reference to mandatory rules should have no application”. The Supreme Court’s rejection of Prato’s bid for appeal serves to underline and reaffirm the International in ISDA’s acronym. While the judgement represents final closure of this potential liability escape route; Prato is only one of approximately 600 Italian municipalities who between 2001 and 2008 together entered into swaps with a total notional in excess of EUR 35bn. In the context of these numbers- like Hope, legal argument springs eternal, no one should be surprised to see further challenges mounted on new, perhaps more promising grounds.
  EWCA Civ 1267
 Dexia Crediop S.p.A. v Comune di Prato  EWHC 1746 (Comm)
 The Rome Convention applied to contracts signed between 1 April 1991 and 17 December 2009. It was superseded by the Rome Regulation I which contains an essentially identical provision to its predecessor’s Article 3(3)
 Dexia Crediop S.p.A. -v- Comune di Prato  EWCA Civ 428