English Court Of Appeals Confirms Primacy Of 'Choice Of Law Clause' In ISDA Master Agreements

On June 15, 2017, the English Court of Appeal handed down a unanimous judgment in the case of Dexia Crediop v. Comune di Prato [2017] EWCA Civ 428 (the "Dexia v. Prato case"), confirming that the nature of an agreement made pursuant to an ISDA Master Agreement will be sufficiently international in character to prevent the application of any mandatory rules of local law. The decision follows a series of challenges made by several European public authorities in the English courts, arguing that notwithstanding the choice of law adopted by parties to an ISDA Master Agreement, Article 3(3) of the Rome Convention permits the application of mandatory local rules.

In the Dexia v. Prato case, the Court of Appeal underscored the narrow circumstances in which Article 3(3) will apply. The Court held that Article 3(3) was inapplicable because of two facts that constituted separate international and "relevant" elements: (i) the parties executed the 1992 ISDA Master Agreement (Multicurrency – Cross Border), and (ii) Dexia hedged its exposure under the swaps with back-to-back transactions with foreign banks.

The decision builds on the Court of Appeal's earlier decision in Banco Santander Totta SA v. Companhia Carris de Ferro de Lisboa SA [2016] EWHC 465, leaving only limited scope for such choice of law challenges in the English courts.

As explained in a Cadwalader memorandum addressing the case, the English High Court ruled that the Agreement was subject to Italian law because (i) "the swaps were entered into in Italy by Italian incorporated parties," (ii) "communications between the parties occurred in Italy," (iii) "Dexia was subject to the Italian financial services regime" and (iv) "the obligations under the swaps were to be performed in Italy."

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