Deutsche Bank AG London v Comune di Busto Arsizio
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Cockerill |
| Judgment Date | 12 October 2021 |
| Neutral Citation | [2021] EWHC 2706 (Comm) |
| Docket Number | Case No: FL-2018-000003 |
| Court | Queen's Bench Division (Commercial Court) |
[2021] EWHC 2706 (Comm)
Mrs Justice Cockerill
Case No: FL-2018-000003
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT: FINANCIAL LIST
Royal Courts of Justice
Strand, London, WC2A 2LL
Sonia Tolaney QC and Rupert Allen (instructed by Allen & Overy) for the Claimant
Paul Downes QC and Kevin Pettican (instructed by Pietro Gatto) for the Defendant
Hearing dates: 12 July 2021 – 29 July 2021
Approved Judgment
Introduction
This is a case concerning certain swaps entered into by the Defendant (“Busto”), a small Italian local authority, in mid 2007. Its contractual counterparty was the Claimant, the well-known international bank Deutsche Bank (“DB”). The swaps were governed by English Law.
At the time of contracting, the swaps, which included swapping fully variable rate obligations for those with a collar and floor, were anticipated to be beneficial to Busto (to the tune of over €7.3 million by today's date as regards the principal exchange element). But of course in 2008 the world changed. The swaps have not proved beneficial. In this case Busto says that it is not bound by them – in particular that it lacked capacity to enter into them.
The history of local authorities and swaps in the courts is now a fairly long one and punctuated by a number of judgments exploring the capacity of different sorts of local authorities in a variety of jurisdictions 1.
Here, in very broad terms, the issues before the Court concern the interplay between, on the one hand, a variety of legislative sources of Italian Law, including Articles of the Italian Constitution and Civil Code; and on the other hand, a recent decision of the Joint Civil Divisions of the Italian Court of Cassation/Supreme Court – decision 8770/20 Banca Nazionale Del Lavoro S.p.A v Municipality of Cattolica (“ Cattolica”).
Busto says that the result is that as a matter of Italian law (as it is now to be understood post Cattolica):
i) Principles of Italian administrative law (Article 119 of the Italian Constitution and mandatory rules of Italian public finance) limit the powers of Busto as an Italian local public body, so that Busto lacked the capacity to enter the swap transactions with the consequence that they are void; and/or
ii) To the extent that it was within the legal power of Busto to enter the swap transactions at all, Busto could only do so if the swap transactions were approved by Busto's City Council (pursuant to Article 42(2)(i) of the Consolidated Code of Local Bodies). Since the City Council did not approve the swap transactions, they are void.
DB disputes these propositions. In very broad terms it says that Cattolica does not offer as much of a legal road block as Busto would argue; and that even if it does, on the facts of this case there is no basis for finding that capacity was lacking or that the relevant rules for approvals were not complied with. It seeks a declaration that Busto is bound by the terms of the swap transactions.
There are also numerous additional points and fallback positions on both sides.
In addition to its defence to the Bank's claim, Busto has a counterclaim for restitution of the net sums paid by Busto to the Bank. As of 30th June 2020, the stream of payments between the parties had produced a negative balance for Busto of €3,840,166.74 and €99,136.88 in respect of the two swaps.
If the swap transactions are void and unenforceable, the Bank claims that Busto's restitution counterclaim is governed by English law and raises defences of limitation and change of position. Busto's position is that its restitution counterclaim is governed by Italian law, but even under English law the Bank's defences have no merit.
If the swap transactions are void, the Bank raises a fallback case based on Article 1338 of the Italian Civil Code. Busto's position is that there is no merit in the Bank's claim under Article 1338 as: (i) Busto did not know and could not reasonably have been expected to know of the nullity of the swap transactions at the time that they were entered into in 2007; and (ii) in any event, the Bank cannot establish that it relied without fault on the validity of the swap transactions in circumstances where the Bank was in a far better position than Busto to know the swaps were void.
Because of the range of issues involved this judgment is divided into three parts (Background, Determinative Issues and Contingent Issues) and the following sections:
i) Introduction
ii) Part 1: Background
a) Factual Background [12]
i) DB's involvement [26];
ii) The City Board Resolution [41];
iii) Final Steps [46];
iv) The relevant terms of the Transactions [52];
v) The structure and financial essentials of the deal [56];
vi) Subsequent events [73].
b) Legal background:
i) Swaps in the Courts of England and Wales [84];
ii) The Approach to Foreign Law [104];
iii) The relevant Legislative Provisions [109];
iv) The Cattolica Decision [120];
(a) First Instance: Case No. 5244/2009: The Court of Bologna [125];
(b) On Appeal to the Court of Appeal of Bologna: Case No. 734/2014 [127];
(c) The Supreme Court [131]
c) The trial [156];
d) The issues [170].
iii) Part 2: The Determinative Issues
a) Capacity absent Cattolica [173];
b) Capacity and Section 9 of Cattolica [206];
c) Cattolica and Speculation [275];
d) Ministerial Decree 389 and Law 448/2001 [307];
e) Article 42 of TUEL [317];
f) Determination and matters for consequential argument [365].
iv) Part 3: Contingent Issues
a) The other TUEL issues [367];
b) The restitution claim [410];
c) Article 1338 [419]
Part 1: Background
Factual Background
DB is incorporated in Germany with a branch in London. It is part of the Deutsche Bank Group of companies. In 2007, at the time of the events giving rise to this dispute, the Bank operated in Italy through an Italian subsidiary of the Deutsche Bank Group, namely Deutsche Bank S.p.A. DB has operated in the Italian local authorities' market since 1980.
Busto is the local municipal authority for the city of Busto Arsizio in part of the Province of Varese in Lombardy, Northern Italy. It is a small city with approximately 83,000 residents.
Mr Downes QC for Busto has repeatedly emphasised that this is a case about a small local authority acting for a small number of real people and that the sums in issue here are very meaningful to them. He pointed out that in 2007 Busto had revenues of €47,293,616, of which €30,551,749 represented tax revenue collected from its local citizens, and €16,741,867 represented transfers from the Italian State. In 2007, Busto's total expenditure on social and educational services for the year was €12,404,123.
In 2007, Busto had outstanding borrowing from various lenders which amounted to €72.8 million, 57% of which was at a variable interest rate. The final repayment date on these loans was on 30 June 2031, however the repayments were structured such that the principal amounts due were heavily concentrated between 2007 and 2014. In particular, as at 2007 Busto's repayment profile required 52% of its outstanding borrowing to be paid over the next 6 years up to the end of 2013, whilst repayment of the remaining 48% would be spread out over the next 18 years.
Busto had previously entered into an interest rate swap with Banca Monte dei Paschi di Siena (“MPS”) in 2002 (“the 2002 Swap”), under which Busto would pay a variable interest rate to MPS whilst receiving a fixed interest rate in return (the relevant terms are set out in more detail below at paragraph 56). While there was some suggestion in passing that there might be a question over the validity of this swap, that formed no part of the pleaded case, and I assume that swap was valid.
The City Council and City Board
This case raises some issues about the government structure in relation to Italian local authorities. In particular there is an issue about whether approval of the relevant swaps fell to the City Council or the City Board.
Busto's City Council is the democratically elected body of the municipality. In 2007 it had 30 members. Broadly speaking, it was common ground that the role of the City Council within the municipal administration is to set overarching policy and guidelines. It is then for the City Board and the administrative departments to implement that policy. The role of the City Council is to make policy and set guidelines, and would not generally extend to the entry into contracts. It was the evidence of Prof. della Cananea that the separation of responsibility for policymaking, on the one hand, and policy implementation and managerial activity, on the other, was a fundamental distinction in Italian administrative law.
The City Board is the executive political body and it is therefore entitled to exercise political discretion in its own right. It is not democratically elected but is made up of up to twelve individuals appointed by the Mayor (who also chairs the Board). The Mayor is democratically elected in direct elections. Busto also has various administrative departments, each with a Director at its head.
As set out in Busto's Municipal Bye-Laws, the City Council has the decision-making powers that are provided by Article 42 of Legislative Decree No. 267 of 2000 (also referred to as “the Consolidated Code of Local Bodies”). Those provide that:
i) The City Council is responsible for all matters bearing on the financial position of the authority. For example, Article 42(2)(b) is concerned with the budgets (and changes to the budgets); Article 42(2)(f) is concerned with the introduction of taxes and regulations concerning taxes; Article 42(2)(h) concerns the taking out of loans, credit facilities and bond...
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