Swaps entered into between the Municipality of Prato (the Municipality or Prato) and Dexia Crediop (Dexia) are null and void because the relevant contractual documentation did not provide the right of the Municipality to withdraw within seven days after the execution  of  the contract.

The Queens’s Bench Division of the High Court (the English Court) has reached the above conclusion in its judgment released on 29 June 2015, bringing an end to litigation proceedings commenced in 2010 between Dexia and the Municipality.

In 2002, the Municipality appointed Dexia as advisor for the management and renegotiation of its indebtedness. Dexia advised the Municipality that it should enter into six swaps. Each of these six swaps had been documented under the International Swaps and Derivatives Association (ISDA) standard forms.

The ISDA forms did not, and still do not, confer in any provision the right of the client to withdraw from the contract within seven days after the execution of the transaction.

Under Italian law, a derivative instrument can be validly sold to a non-professional client only if the client has been informed in writing about its right to withdraw from the relevant agreement within the subsequent seven days after the execution of the transaction. In the event of a lack of such information, the entire agreement is null and void. According to the Italian Supreme Court of Cassation (judgment No. 13905/2013) the provision governing the right to withdrawal, which is prescribed from Article 30, paragraph 7, of the Italian Unified Financial Act (Legislative Decree 58/98), cannot be derogated by the parties because it is a mandatory rule.

Bearing in mind the interpretation of Article 30, paragraph 7, of Legislative Decree 58/98 elaborated by the Italian Supreme Court of Cassation, the English court has simply applied Article 3, paragraph 3, of the Rome Convention to the Prato case. In particular, Article 3, paragraph 3, does not allow the parties to an agreement governed by English law to derogate from the mandatory rules of the jurisdictions where each party is respectively based.

The English Court has therefore simply recognised that Article 30, paragraph 7, is a mandatory rule and the ISDA model (as well as each confirmation documenting the transactions) governing the derivatives transactions between Prato and Dexia was null and void because it did not contain a specific mention of the right of Prato to withdraw from each relevant derivative transaction within the subsequent seven days after the execution.

In this respect, the English Court has clarified that Article 30 is undoubtedly a mandatory rule for the purpose of the Rome Convention. This article requires that in all cases where the bank promotes financial instruments or any investment service outside its registered office or the branch offices of the issuer/person promoting the service (and this promotion concludes in the signing of the contract), the customer has the right to withdraw within seven days starting on the date of the subscription. Such right shall be put in writing in the forms submitted to the customer by the financial intermediary. Failure to include such provisions in the relevant documentation will result in the contracts being null and void, with only the client having the right to benefit from this provision.

The outcome of the Dexia v Prato case is extremely important.

It will certainly set a precedent as to whether or not the Rome Convention can be applied to transactions signed under an ISDA Master Agreement (as long as all other elements concerning the contract take place in one country). In this respect, the judgment in question has pointed out that the standardised contractual models need to be adapted to the relevant jurisdictions where the clients are based and cannot be used as a passepartout for any jurisdiction. This implies that the role of the local counsel when negotiating a standardised international contract remains crucial. In fact, irrespective of whether the ISDA Master Agreement has been conceived under English law, the same type of derivative instruments may even require significant amendments to the general ISDA model before entered into agreement, so as to reflect the mandatory rules of the jurisdictions where the relevant client is based. It is not the first time that the use of ISDA models has raised issues in connection with Italian clients. Recently, another judgment (No. 2926 of 2012) released by the Italian Supreme Court of Cassation had pointed out that despite the fact that the ISDA was governed by English law and the parties had elected the English jurisdiction, the disputes arising from extra contractual liabilities had to be resolved by an Italian court. With specific regard to Prato, the crucial issue was that Prato was not a qualified investor (professional client), and therefore the mandatory rule regarding the right to withdraw fully applied to the transactions entered into by Prato.

Considering the vast number of Italian clients (and particularly a significant number of municipalities) that have entered into derivatives transactions using ISDA models without considering the prescriptions of Article 30, paragraph 7 of the Legislative Decree 58/98, it can be argued that they can successfully resolve that the derivatives contracts are declared null and void. It goes without saying that they will preliminarily have to demonstrate that they were not qualified investors at the time of execution of the transactions.