The Court of Appeal has unanimously upheld(1) a Commercial Court decision from the first trial heard within the new Financial List.(2) The appeal related to the application of Article 3(3) of the Rome Convention(3) to interest rate swap instruments. In upholding the decision, the Court of Appeal praised the "remarkably conscientious, clear and detailed judgment" which was rendered three months after conclusion of the trial. The outcome of the appeal provides further clarification on the application of the Rome Convention to derivative instruments, including in relation to the inconsistent approach between the decision in this case and the earlier decision in Dexia,(4) and signals a strong start for the Financial List.


Respondent Banco Santander Totta SA is a Portuguese entity within the Santander banking group. The appellants (Companhia Carris de Ferro de Lisboa SA and others) are Portuguese public sector transport companies, which run the metro, bus and tram services in Lisbon and Porto, Portugal.

Between June 2005 and November 2007, the respondent and appellants entered into nine interest rate swaps, which were governed by International Swaps and Derivatives Association (ISDA) master agreements and subject to English law and jurisdiction clauses, seven of which were subject to this appeal. The swaps were long-term interest rate swaps, under which (with one exception) the appellants were the fixed-rate payers and the respondent was the floating rate payer. The swaps were referred to as 'snowball' swaps and provided that once the reference interest rates (the Euro Interbank Offered Rate and sometimes the London Interbank Offered Rate) moved outside upper or lower 'barriers', the fixed rate payable by the appellants would have a spread added to it. The spread was cumulative at each payment date and was subject to leverage.

The swaps initially provided positive cash flows for the appellants. However, the sustained near-zero interest rates since 2009 meant that the snowball structure of the swaps caused the interest rates payable by the appellants to increase substantially. An agreed table of interest rates payable as at October 21 2016 showed that interest rates under the swaps ranged from approximately 30% to 92%. By October 1 2015, the swaps had a negative mark-to-market value of more than €1.3 billion.

The appellants had ceased to make payments under the swaps in 2013. The respondent issued proceedings in the English courts, seeking a declaration that the appellants' obligations under the swaps constituted legal, valid and binding obligations.

The appellants advanced the following defences to the claims:

  • Under Portuguese law, each appellant lacked capacity to enter into the swaps and the swaps were therefore void.
  • Under Article 3(3) of the Rome Convention, even though the ISDA master agreements specified that the swaps were governed by English law, certain mandatory rules of Portuguese law also applied under which the swaps:
    • were unlawful as 'games of chance' or speculation and were therefore void; and
    • were liable to be terminated under Article 437 of the Portuguese Civil Code due to abnormal change of circumstances since the swaps were entered into.
  • The respondent was in breach of its duties under the Portuguese Securities Code, which meant that the appellants were entitled to damages which extinguished their liabilities under the swaps.

Article 3(3) of Rome Convention

Article 3(3) of the Rome Convention provides:

"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'." (Emphasis added.)

The Commercial Court held that Article 3(3) was not engaged in this case, because all the elements relevant to the situation at the time of the choice of law were not solely connected to Portugal. In other words, the swaps were not purely domestic contracts. In particular, in reaching this decision the Commercial Court relied on:

  • the respondent's right to assign its rights and obligations to a bank outside Portugal;
  • the use of standard international documentation (the ISDA master agreements);
  • the practical necessity for the relationship with a bank outside Portugal;
  • the international nature of the swaps market in which the contracts were concluded; and
  • the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements were routine.

Accordingly, the Commercial Court concluded that Portuguese 'mandatory rules' did not apply and the swaps were legal, valid and binding. The Commercial Court also rejected the appellants' arguments on lack of capacity and held that they had had legal capacity to enter into the swaps, and also held that the alleged duties under the Portuguese Securities Code did not exist.


The appellants appealed the Commercial Court's decision on the application of Article 3(3) on four grounds.

First, the appellants claimed that in approaching the determination of whether "all the other elements relevant to the situation are connected with one country only", the court should have had regard only to objective elements which (in the absence of express choice of law) would be determinative of the proper law applying conflict of law provisions. The appellants argued that the Commercial Court had been wrong to have included consideration of elements that pointed directly away from a purely domestic to an "international situation".

The Court of Appeal rejected this ground and confirmed that enquiry under Article 3(3) includes elements that point directly from a purely domestic to an international situation; putting it another way, the only question under Article 3(3) is whether the situation is purely domestic. It indicated that Article 3(3) is to be approached as a limited exception to the "policy or principle or starting point of party autonomy and, as such, is to be construed narrowly". The Court of Appeal went on to note that the use of the term 'elements relevant to the situation' in Article 3(3) should be construed using the natural and ordinary meaning of the words. The Court of Appeal said that had it been intended that determination of the test in Article 3(3) should be confined to factors of a kind which connect the contract to a particular contract for the purpose of identifying the proper law in the absence of express choice, the drafter could have used the words 'close connection' that appear in Article 4.

In disposing of this part of the appeal, the Court of Appeal also provided useful guidance on the inconsistency between the Commercial Court's decision in this case and the decision in Dexia Crediop Spa v Commune Di Prato.(5) In Dexia it was held that the fact that the standard ISDA form is designed to promote certainty does not make it an 'element in the situation' in this context, since it is not itself connected to a particular country. The Court of Appeal commented that, to the extent that Dexia operated to confine the elements of the situation to those factors with a connection to a particular country in a conflict of laws sense, it respectfully disagreed with that decision.

As to the second ground for appeal, the appellants claimed that the Commercial Court had wrongly taken into account the five abovementioned factors as indications that all elements relevant to the situation at the time of choice of law were not connected with Portugal only. The appellants claimed that had the Commercial Court taken into account only admissible matters and given proper weight to those matters, it would have concluded that none of those matters pointed directly to an international situation for the purposes of Article 3(3).

The Court of Appeal rejected this ground. It noted the Commercial Court's observations regarding the international nature of the "Multi Currency Cross-Border" form of the 1992 ISDA Master Agreement and its use in relation to the swaps (rather than the "Local-Currency-Single Jurisdiction" form), and the international nature generally of the over-the-counter market for interest rate swaps. The Court of Appeal noted that where a decision at first instance involved an evaluative exercise, the Court of Appeal should interfere with that evaluation only if there has been an error in principle or it is plainly wrong. The Court of Appeal had already concluded that it agreed with the Commercial Court's approach to the factors to be included in its evaluation. It further observed that the Court of Appeal should be particularly cautious of concluding that there has been an error in principle or that the evaluation is plainly wrong "in a case like the present, where the appeal is from an expert and specialist court, like the Financial List".

Grounds three and four of the appeal related to whether the swaps should be treated as terminated by virtue of Article 437 of the Portuguese Civil Code, which the appellants claimed should apply as mandatory rules under Article 3(3). Having disposed of the first two grounds of appeal, these issues did not arise.


This case provides useful guidance on the application of Article 3(3) of the Rome Convention to derivative instruments and the factors to be considered in any evaluation. In particular, it has clarified the previous contradiction between the Commercial Court's decision in this case and in Dexia. The Court of Appeal has confirmed that the term 'elements of the situation' is not confined to an assessment of those factors which have a connection with a particular country in a conflict of laws sense. Indeed, the fact that ISDA standard documentation is designed to achieve certainty for the parties should be taken into account. This decision will be welcomed by many operating in the international derivatives market as a decision in favour of parties' autonomy and contractual certainty.

As an aside, the Court of Appeal judgment also indicates that some particular deference by the senior courts to decisions originating from the Financial List may be expected where it is appreciated that matters of evaluation reflect particular specialist and industry knowledge.

For further information on this topic please contact Simon Hart or Charlotte Ducker at RPC by telephone (+44 20 3060 6000) or email ( or The RPC website can be accessed at

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(1) Banco Santander Totta SA v Companhia De Carris De Ferro De Lisboa SA [2016] EWCA Civ 1267.

(2) [2016] EWHC 465 (Comm).

(3) The Convention on the Law Applicable to Contractual Obligations 1980.

(4) Dexia Crediop Spa v Commune Di Prato [2015] EWHC 1746 (Comm).

(5) [2015] EWHC 1746 (Comm).