English law trumps Italian contractual arguments in swap litigation
The ruling in favor of Deutsche Bank comes after a controversial May 2020 judgment by the Italian Supreme Court in a similar case. The Italian court ruled in favor of the local authority, ruling that the exchange contract was inapplicable under Italian law and that the local authority in question did not have the legal capacity to enter into it.
The English High Court interpreted the decision of the Italian Supreme Court as being based on the principles of Italian contract law, as opposed to legal capacity. He did not find any major problem with the legal capacity of Italian local authorities to conclude exchanges.
Litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law, said the ruling meant English law exchanges with Italian local authorities remained enforceable in that jurisdiction despite the Supreme Court ruling. Italian.
“The contractual arguments of Italian law just don’t apply because the swaps were drafted under English law,” Hawthorne said.
The decision of the Italian Supreme Court in the dispute between the Banca Nazionale Del Lavoro and the municipality of Cattolica was the culmination of a long series of cases in Italy in which the Italian local authorities had raised various arguments in an attempt to escape pre-2008 interest rate swaps.
Hawthorne said there had been controversy in Italy over the impact of the Cattolica decision, as it was not clear whether it meant local authorities generally lacked the capacity to close trades, or that It is only in certain limited factual scenarios that the level of information provided by the bank in the sale renders the swap null. This controversy has led many local authorities in Italy to sue their banks to escape swaps which are currently costing them dearly.
Hawthorne said there is a two-track litigation strategy typically used for these cases, with local authorities suing the bank in Italy and the bank responding with a case in English courts. This strategy had put the English and Italian courts in a race to determine Cattolica’s impact on English law exchanges.
“There are a number of cases pending in English courts in which the consequences in Italian law of the Cattolica decision are hotly contested,” said Hawthorne.
Although in the Deutsche Bank case the High Court clarified whether swaps governed by English law remained binding, it did not rule on the legal capacity of Italian local authorities to enter into the swaps. Surprisingly to some Italian scholars, the English court said that, had it been required to decide the point, it might have decided that the Catholic ruling was wrong under Italian law.
As a fallback position, Deutsche Bank argued that the local authority, Comune di Busto Arsizio, could not escape its obligations, even if it did not have the capacity to complete the exchange. Indeed, Busto Arsizio had told the bank when entering into the swap that she in fact had the legal capacity to do so.
A previous case in 2014 between Credit Suisse and a Dutch social housing association, Vestia, set a precedent for capacity. In that case, the judge concluded that Vestia had entered into transactions without having the capacity to do so, but the framework contract under which the swaps were concluded remained valid, and in the framework contract the association had declared to the Credit Suisse that it was able to enter into these contracts.
The judge in the Deutsche Bank case, Madam Justice Cockerill, said that if the problem had arisen, she would not have wanted to follow the Vestia decision. She said: “The doctrine is a doctrine which has been established on a very narrow basis and has not yet received the approval of the Supreme Court. There are concerns expressed in academic commentaries about its principled basis and capacity for unchecked growth. “
Hawthorne said he expects the capacity argument to continue in other disputes.
“There are a number of similar cases pending, and the local authorities in those cases will no doubt try to find a way to reopen the capacity argument one way or another. This is a compelling argument for them because, if they could win the point, it would open up claims to get back all the money they have paid the banks over the years. At this point, we would finally have a path to an appeal judgment on Vestia’s arguments, ”said Hawthorne.