The High Court has recently considered a claim brought by an Italian bank against an Italian local authority for the recovery of €6.5 million under an interest rate swap arrangement governed by English law.
In 2002, Dexia Crediop S.p.A. (“Dexia”), an Italian bank, began advising an Italian local authority known as Comune di Prato (“Prato”) on debt restructuring and interest rate swaps. Shortly thereafter, Dexia and Prato entered into a “master agreement” which set out the terms which were to govern interest rate swap transactions between the parties. In a schedule to the master agreement, the parties agreed that English law was to govern the agreement. Six swaps took place between December 2002 and June 2006. All obligations under swaps 1 to 5 were performed by each side as and when those obligations fell due. Prato, however, defaulted under swap 6.
Dexia’s brought proceedings against Prato for the recovery of sums it said should have been paid by Prato under swap 6 on and from 31 December 2010, pleaded as €6,504,878.35 as at 31 December 2013. Prato contended that it was not bound by swap 6 or swaps 1 to 5 and that the obligations under each of them could not be enforced by Dexia. Specifically, Dexia argued that its obligations under the swaps were unenforceable as they contravened general principles of Italian law and local government law, which, in accordance with article 3(3) of the Convention 80/934/ECC on the law application to contractual obligations (the “Rome Convention”), could not be derogated from. Prato relied upon article 30.6 of the Italian financial services law known as Testo Unico della Finanza (“TUF”), which required a 7 day cooling off period to be given for contracts made off-site, to argue that all the swaps were null and void.
The High Court held that the swaps did not contravene relevant Italian local government law and found Prato’s allegations in this regard to be “unsustainable”. On the evidence, however, Prato was found to be entitled to rely on article 30.6 TUF. This provision was considered by the High Court to be a mandatory provision under article 3(3) of the Rome Convention that could not be derogated from. Accordingly, Dexia’s failure to notify Prato of its right of withdrawal within seven days of entering into each swap meant each of the swaps was null and void and Dexia’s claim failed.
The decision of the High Court highlights the importance for banks and other financial institutions to have regard to local mandatory rules which may conflict with a chosen jurisdiction and the serious consequences which can follow as a result of non-compliance.