The Court of Appeal (Flaux C, Males and Falk LLJ) has handed down judgment in Banca Intesa Sanpaolo and Dexia v Comune di Venezia [2023] EWCA Civ 1482, overturning the Commercial Court’s finding that English law swaps under the ISDA Master Agreement were void for lack of capacity, and finding that the swaps were valid and binding in accordance with their terms.
In 2007, the appellant Italian banks had entered into interest rate swaps with the respondent, the municipality of Venice, as part of a restructuring of the municipality’s debts. The transactions involved the novation of a pre-existing swap to the Banks and the restructuring of the swap to align its terms with changes to Venice’s underlying borrowing. As is commonly the case, the negative mark-to-market under the pre-existing swap was rolled over into the restructured swaps with the Banks. After the parties entered into the swaps, again like many such transactions, the Financial Crisis and the resulting fall in interest rates significantly impacted the amounts payable under the swaps.
In the intervening 15 years, many Italian local authorities sought to extract themselves from their swap positions in litigation in both England and Italy. In light of the emphasis placed on security of contract, the English litigation proved entirely unsuccessful.
However, in its first instance judgment ([2022] EWHC 2586 (Comm)), the Commercial Court found that Venice did not have capacity to enter into the swaps such that they were void, on the basis of the decision of the Italian Supreme Court in the Cattolica litigation in 2020. The Commercial Court further found that limitation did not begin to run until that decision, and as such Venice was able to recover all of its payments under the swaps, back to 2007 (subject to a defence of change of position).
After a four day appeal heard in October 2023, the Court of Appeal unanimously overturned the Commercial Court’s finding that the swaps were impermissible under Italian law and therefore outside Venice’s powers. Among other reasons, the Court of Appeal held that the Commercial Court had misanalysed the transactions and that rolling over the negative mark-to-market in the context of a restructuring did not amount to speculation under Italian law ([151]-[175]). Accordingly, the Court of Appeal allowed the Banks appeal against the finding that the transactions were impermissible ‘speculation’ and otherwise contrary to Article 119(6) of the Italian Constitution (at [175]).
The Court also found that, had the point arisen, limitation would have begun running prior to the decision of Cattolica, as an Italian local authority “would have recognised that it had a worthwhile claim” when other such authorities issued their claims in the English courts from 2010 (at [187]). It was irrelevant (applying the Supreme Court’s decision in FII v HMRC [2022] AC 1) that the claim might not ultimately be successful.
In rejecting Venice’s cross-appeal, the decision also considered two significant issues in the conflict of laws and the law of restitution:
(1) The Court of Appeal answered the long running question as to whether, at common law, a claim to recover payments made under a void contract will usually be governed by the law applicable to that contract. Flaux C held that there is an “obvious very close and real connection” between the law governing the void contract and the law governing restitution”, and Foxton J’s reasoning “cannot be faulted” (at [182]-[183]).
(2) The Court of Appeal also confirmed that a defence of change of position was in principle available against a claim for recovery of payments under a void contract where payments were subsequently made under hedging swaps, rejecting two prior Commercial Court authorities (at [189]-[196]), confirming Foxton J’s “compelling analysis” (at [193]).
Sonia Tolaney KC, Michael Watkins and Matthew Hoyle appeared for the successful appellants, Banca Intesa Sanpaolo SpA and Dexia Crédit Local SA, instructed by Bonelli Erede Lombardi Pappalardo LLP. A copy of the decision is available here.
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