UK Court Of Appeal Overturns Judgment In Latest Italian Swaps Decision Concerning Corporate Capacity

• Published date: 28 February 2024
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Sovereign Immunity: Public Sector Government, Trials & Appeals & Compensation
• Law Firm: Mayer Brown
• Author: Mr Stephen Moi, Sarah Garvey, Lauren Theodoulou, Sarah Shearman, Samantha Green, Ashley McDermott, Nanak Keswani and Robyn Llewellyn

In December 2023, the England & Wales Court of Appeal unanimously overturned the high-profile ruling handed down by the Commercial Court in October 2022 in the case of Banca Intesa Sanpaolo and Dexia v Comune di Venezia¹. In its judgment, the Court of Appeal reversed the Commercial Court's finding that English law governed swaps under the 1992 ISDA Master Agreement entered into shortly before the financial crisis of 2007-2008 were void for lack of capacity, and instead found that the swaps were valid and binding in accordance with their terms.

This decision follows a series of cases in the Italian and English courts in recent years arising out of swaps entered into by Italian public bodies who have sought to challenge the validity of the swaps following the financial crisis; in particular, since the case of Banca Nazionale del Lavoro SpA v Comune di Cattolica, where the Italian Supreme Court held that certain interest rate swaps entered into by Italian local authorities were unenforceable as a matter of Italian law because the local authorities had no corporate capacity to enter into them.

The Court of Appeal's decision has already been cited with approval in another case before the English courts², finding in favour of the banks and holding that the swaps are in fact valid and binding in accordance with their terms, notwithstanding Cattolica. The Court of Appeal's judgment also clarified the approach that the courts, and appeal courts, should take in relation to issues of foreign law.

Factual background

In 2007, the appellant Italian banks (the "Banks") entered into interest rate swaps with the municipality of Venice ("Venice"), as part of a restructuring of the municipality's debts (the "Swaps"). The Swaps were in fact a novation of similar hedging arrangements that Venice had had in place with Bear Stearns (the "Original Swap").

The 2007-2008 financial crisis significantly impacted the amounts payable under the Swaps and the Swaps subsequently became the subject of disputes.

In August 2019, the Banks commenced proceedings in the English Commercial Court, seeking declarations that the Swaps were valid and binding, and alternative relief in contract and tort.

Significantly, in 2020, the Italian Supreme Court in the case of Banca Nazionale del Lavora SpA v Comune di Cattolica ("Cattolica") held that for the purposes of Italian law in effect until 2013, a local authority did not have capacity to enter into speculative derivatives, and that certain types of swaps could constitute indebtedness for the purposes of Article 119(6) of the Italian Constitution, which permitted indebtedness "only as a means of funding investments" thus precluding indebtedness for speculative purposes.

Venice argued that the Swaps were void, on the basis that (among other things), under Cattolica, it had not had...