Dexia Crediop S.P.A. v. Comune di Prato  EWCA Civ 428
Dexia was appointed as Prato's adviser in relation to debt restructuring and interest rate swaps in 2002. In November 2002, Dexia and Prato entered into an ISDA Master Agreement (1992 version), containing English choice of law and jurisdiction clauses, pursuant to which they entered into six interest rate swap transactions. From late 2010, Prato stopped making payments due under the sixth (and only outstanding) swap and began a process of administrative self-redress in Italy. Dexia started proceedings in England, claiming the sums due to it. Prato defended the proceedings in the English court on bases including: (a) that the swaps were void as a matter of English law because of Prato's lack of capacity; and (b) Prato was entitled to treat the swaps as null and void, because of breaches by Dexia of mandatory rules of Italian law.
The aspect of this case which had considerable practical relevance was the superficially abstract question of the role of article 3(3) of the Rome Convention.1 Prato relied on article 3(3), which states that: "The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law of that country which cannot be derogated from by contract, hereinafter called 'mandatory rules'." Prato argued that article 3(3) was engaged, because the swap was only connected with Italy. It alleged that Dexia had breached a number of requirements of Italian law that were properly characterised as mandatory rules, with the consequence that the swap was voidable by Prato. The judge at first instance agreed, holding (in summary) that neither the use of a globally-accepted, standard form ISDA Master Agreement, or Dexia's use of banks outside Italy in order to hedge its own exposure, amounted to a connection with a country other than Italy. Dexia had therefore been obliged to comply with any mandatory rules of Italian law (which it had not). Please click here for our summary of the first instance decision.
In essence, therefore, the judge determined that "standard form" was not as standard as Dexia thought. In concluding an agreement with Prato, it had been obliged to take into account a number of Italian law requirements that the ISDA framework did not contemplate. If this judgment were correct, there would be both legal and commercial implications.
Only a short time after the first instance judgment in Prato, the Commercial Court came to a different view in Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA  EWHC 465 (Comm) (please click here for our summary of that judgment). In that case, the court held that it was enough to consider elements pointing away from the purely domestic, and there was no need to establish a connection with another specific jurisdiction (as the judge in Prato had appeared to consider necessary). This decision, while arguably preferable to that in Prato, appeared to conflict with it.
That conflict has now been resolved by the Court of Appeal in two judgments of 2017. The first upheld the decision at first instance in the Banco Santander case. The more recent, in the Prato litigation, applied the same principle to similar effect. The Court of Appeal in Prato was bound to follow the decision on appeal in Banco Santander as to the meaning of article 3(3). Consequently, it held that there was no need to establish a link to a specific jurisdiction other than Italy, provided that there were elements that lent an international flavour and pointed away from Italy.
In this regard, the judgment notes two elements, each of which would be sufficient to break the exclusive connection of the transaction with Italy:
- use of the ISDA Master Agreement, in particular its international nature, the fact that the use of the Multicurrency – Cross-Border form contemplates the involvement of more than one country or currency, and the fact that the agreement was signed in English (not the first language of either party); and
- back-to-back hedging of the swap by Dexia outside Italy, which was described as "highly significant".
Both judgments by the Court of Appeal should come as a relief to banks routinely using standard form documentation such as that provided by ISDA. They provide some comfort that English courts are likely to take a consistent approach to parties' obligations, irrespective of the jurisdiction in which the transactions actually happen and that, in most cases, parties will not have to build tailored local requirements into the standard forms they use.