Banca Intesa Sanpaolo SPA v Comune DI Venezia

Hearing dates: 24, 25, 26 and 27 October 2023

Approved Judgment

This judgment was handed down remotely at 10.30am on 13 December 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

These appeals from the orders of Foxton J dated 14 October 2022 and 8 February 2023 concern the validity of two interest rate swap (“IRS”) transactions (“the Transactions”) entered into in December 2007 between the claimant Banks (to which I will refer as “the Banks”) and the Comune di Venezia (to which I will refer as “Venice”) and Venice's entitlement to restitution of sums paid under the Transactions. The judge found that the Transactions were void because Venice had no power to enter into them under Italian law (on the basis that the Transactions were speculative and involved recourse to indebtedness in breach of Article 119(6) of the Italian Constitution) which, in English law, means that Venice lacked capacity. He also found that Venice's counterclaim for restitution of sums paid under the Transactions was not time-barred under the Limitation Act 1980, but that the Banks were in principle entitled to raise a defence of change of position to that counterclaim.

In broad terms, the Banks' appeal contends that the judge erred in finding that (i) the Transactions (which were subject to English law and jurisdiction) were void because Venice lacked capacity under Italian law; and (ii) if the Transactions were void, Venice's counterclaim for restitution was not time-barred by reason of section 32(1)(c) of the Limitation Act 1980. The Banks also seek permission to appeal on a ground which contends that the decision of the Italian Supreme Court in Banca Nazionale del Lavora SpA v Comune di Cattolica (2020) (“ Cattolica”) upon which the judge placed considerable reliance in reaching his conclusions on Italian law should not be given retrospective effect. This was an argument which was not run by the Banks before the judge. By an order dated 27 April 2023, Males LJ ordered that the issue of whether permission to appeal should be granted should be considered on a rolled-up basis at the hearing of the appeals.

Again in broad terms, Venice's appeal contends that the judge erred in finding that: (i) the counterclaim for restitution was governed by English, as opposed to Italian, law; and (ii) English law in principle affords a change of position defence to the Banks.

Factual and procedural background

As the judge recorded in [17] of his judgment, the parties agreed a factual narrative on which he drew extensively for Section C of his judgment dealing with the facts and there was only a relatively limited area of factual dispute. In the circumstances I have been able to summarise the factual background in so far as it is relevant to the appeals in reliance on that Section C which contains a fuller analysis of the entire factual background.

On 23 December 2002, Venice issued a 20-year floating rate bond (the “Rialto Bond”), and around the same time entered an IRS with Bear Stearns (the “Bear Stearns swap”) for the same notional amount as the Rialto Bond in order to hedge its interest rate exposure. Under the Bear Stearns swap, Venice benefitted from both a cap on the variable rate payable under the Rialto Bond and a floor below which it would pay a fixed rate (a so-called “collar” transaction). The original maturity date for the Bear Stearns swap was 23 December 2005 subsequently extended in 2003 and 2004 to 23 December 2022, also with amendments to the rates payable. By the amendment effective on 23 June 2004, Venice was exposed for the period from 23 December 2006 to 23 December 2022 to the risk of paying a fixed rate of 5.45%, although it had the benefit of a cap of 7%.

In 2007, Venice proposed a restructuring of the Rialto Bond so as to free up resources in its municipal balance sheet. On 20 December 2007, it was restructured by extending its maturity date to 2037, with an amended coupon (the “Amended Rialto Bond”). As a consequence of that restructuring, the Bear Stearns swap was no longer aligned with Venice's exposure to interest rate risk under the Amended Rialto Bond. However, Bear Stearns was not willing to amend the Bear Stearns swap and even threatened to terminate it. Accordingly, Venice agreed to a restructuring of the Bear Stearns swap with the Banks which took the following form. Bear Stearns, the Banks and Venice entered into ISDA novation confirmations under which 68% of the Notional Amount of the Bear Stearns swap was novated to Banca Intesa in return for a Novation Fee of €5,484,200 and 32% of the Notional Amount of the Bear Stearns swap was novated to Dexia in return for a Novation Fee of €2,580,800. The Novation Fees reflected the value to Bear Stearns (i.e. the negative mark to market (“MTM”) in its favour) of the Bear Stearns swap. The Banks thus stepped into the shoes of Bear Stearns, as is made clear by the terms of the ISDA Novation Agreement exhibited to the ISDA Novation Definitions. The ISDA Novation Definitions also make it clear that each party is acting on its own account, which negatives any suggestion that the Banks were acting as agents for Venice, a point to which I will return later in this judgment. The effect of the novations was to transfer to the Banks the future rights and obligations of Bear Stearns (by reference to which the negative MTM was calculated) in respect of their respective proportions of the novated amounts.

Since the terms of the Bear Stearns swap were not aligned with the Amended Rialto Bond, the existing swap as novated needed to be restructured. Therefore, Venice and the Banks agreed to new terms for the Transactions as set out in ISDA Master Agreements and trade confirmations. Under the Transactions with the Banks, the Banks and Venice agreed a new collar IRS with an extended maturity date matching the Amended Rialto Bond, under which Venice again benefitted from a cap on the variable rate that was payable under the Amended Rialto Bond and agreed to pay a fixed rate if the variable rate fell below the floor. Unlike the Bear Stearns swap, the terms of the Transactions matched the Amended Rialto Bond as to termination date, the interest rate paid by the Banks, the notional amount and the amortisation schedule. However, as would have been the case with any renegotiation between swap counterparties of an existing IRS transaction (for example if Bear Stearns had agreed the amendment Venice was seeking), the terms of the Transactions reflected the existing negative MTM (to Venice) of the novated amounts of the Bear Stearns IRS. Separately, the Banks also entered into “back-to back” swaps with other banks that hedged their exposure under the Transactions.

An important point which should be noted at this stage concerns the status and validity of the Bear Stearns swap. As Ms Sonia Tolaney KC for the Banks pointed out, Venice did seek to argue before the judge that the Bear Stearns swap was invalid so that the Transactions were void for common mistake. The basis for the alleged invalidity was that the Bear Stearns swap had not been approved by the City Council. That argument was roundly rejected by the judge at [324] to [330] of his judgment and is not subject to appeal by Venice. As Ms Tolaney KC also pointed out, Venice never sought to argue before the judge that the Bear Stearns swap was not a hedging transaction but was speculative. Although Mr Raymond Cox KC for Venice sought to suggest in his submissions that there was no basis for an assumption that the Bear Stearns swap was a hedge since the judge made no finding to that effect, given that the judge rejected the case of invalidity that was run by Venice and found that the Bear Stearns swap was valid, the matter is res judicata and this Court will proceed on the basis that the Bear Stearns swap was a valid hedging transaction.

On 31 October 2008, some six weeks after the collapse of Lehman Brothers, Venice received a letter from the President of the VIII Commission of the City Council of Venice querying whether the Transactions were binding and/or could be cancelled on the grounds that they were speculative.

In 2009 and 2010, disputes involving Italian local authorities which had entered into English law IRS transactions first began to be litigated in the Commercial Court. Many of these concerned jurisdictional disputes but the English Courts also engaged with the question whether these IRS transactions were precluded under Italian law. The most significant of these cases was Dexia Crediop SpA v Comune di Prato (“ Prato”) in which Dexia commenced proceedings in December 2010 seeking sums due under swaps which had not been paid by Prato. The trial took place before Walker J in June and July 2014 and judgment was handed down on 25 June 2015 ( [2015] EWHC 1746 (Comm)). In the light of the Italian law adduced before him in that case, Walker J rejected Prato's arguments that the IRS transactions, which involved a number of restructurings rolling over negative MTMs from earlier transactions, were void for lack of capacity. He held...