Dexia Crediop S.p.A. v Comune di Prato
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Walker |
| Judgment Date | 25 June 2015 |
| Neutral Citation | [2015] EWHC 1746 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2010 Folio 1456 |
| Date | 25 June 2015 |
[2015] EWHC 1746 (Comm)
Mr Justice Walker
Case No: 2010 Folio 1456
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Nottingham Combined Court
60 Canal Street
Nottingham
NG1 7EL
Richard Handyside QC & Rupert Allen (instructed by Allen & Overy) for the Claimant
Jonathan Davies-Jones QC & Christopher Burdin (instructed by Seddons) for the Defendant
Hearing dates: 9, 10, 11, 17, 18, 19, 20, 23, 24, 30 June, 1, 8, 9, 10, 15, 16, 23, 24 July 2014
Approved Judgment on Local Government & Financial Services Defences
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version may be treated as authentic.
Paul Walker, 29 June 2015.
Table of Contents
| A. Introduction and outcome on Dexia's main claim | 3 |
| A1. Overview: the 2002 advisory agreement and the swaps | 3 |
| A2. The written evidence | 6 |
| A3. The course of the trial | 8 |
| A4. Market concepts | 9 |
| A4.1 Market concepts: general | 9 |
| A4.2 Some types of swap contract | 9 |
| A4.3 "Mark to market" or "MTM" | 10 |
| A4.4 "Hidden" or "implicit" costs | 11 |
| A5. The outcome on Dexia's main claim | 11 |
| A6. Further matters to be decided | 11 |
| B. Background and history | 12 |
| B1. Background and history: general | 12 |
| B2. From 24 April 2002 to 6 December 2002 inclusive | 12 |
| B3. From 7 December 2002 to 6 August 2003 inclusive | 16 |
| B4. From 7 August 2003 to 30 December 2004 inclusive | 18 |
| B5. From 30 December 2004 to 18 October 2006 inclusive | 20 |
| B6. From 19 October 2006 onwards | 23 |
| C. Italian legal systems, courts and law | 24 |
| C1. Italian legal systems, courts and law: general | 24 |
| C2. English law's approach to Italian law | 25 |
| C3. Italy's systems of law and courts | 25 |
| C3.1 Civil and administrative law in Italy | 25 |
| C3.2 Italian courts and their decisions | 26 |
| C4. Some general principles in Italian law | 28 |
| C4.1 Relevance of previous decisions | 28 |
| C4.2 Statutory interpretation | 28 |
| C4.3 Status of ministerial circulars | 28 |
| D. Local government law defences | 28 |
| D1. Italian local government finance law | 28 |
| D2. Did the swaps contravene local government law? | 29 |
| D2.1 Contravention of local government law: general | 29 |
| D2.2 Did the swaps contravene Art 119 of the Constitution? | 29 |
| D2.3 Did the swaps contravene art 41 of law 448/2001? | 34 |
| D2.4 Did the swaps contravene art 3 of ministerial decree 389/2003? | 40 |
| D2.5 The suggested general prohibition on speculative transactions | 44 |
| D3. Consequences of contravention of local government law? | 45 |
| E. Financial services & civil law defences | 45 |
| E1. Italian financial services & civil law: general | 45 |
| E2. Did the swaps contravene financial services law? | 46 |
| F. Consequences as regards article 30 TUF | 58 |
| G. Prato's counterclaims/Dexia's alternative claims | 58 |
| H. An overview of the stage now reached | 59 |
A. Introduction and outcome on Dexia's main claim
A1. Overview: the 2002 advisory agreement and the swaps
The claimant, Dexia Crediop SpA ("Dexia"), is an Italian bank. The defendant, Comune di Prato ("Prato"), is an Italian local authority with responsibility for the municipality of Prato in Tuscany.
In the spring of 2002 Dexia applied, as one of a number of tenderers, to become Prato's adviser on debt restructuring and interest rate swaps. Debt restructuring, which may involve merely varying the terms of existing debt or may involve extinguishing debt and replacing it with new debt, is as old as debt itself. Interest rate swaps are a modern development. They fall within the type of financial instrument known as "derivatives": contracts that derive their value from the performance of an underlying entity. Market participants often abbreviate the term "interest rate swap" to "IRS".
From 1985 onwards ISDA has produced standard terms, including definitions, for use in the swaps market. ISDA is an association of market participants which was incorporated under the name International Swap Dealers Association, Inc. and which later changed its name to International Swaps and Derivatives Association, Inc. From 1987 onwards it has published standard form master agreements which, once entered into between two parties, enable those parties to make future swaps simply by agreeing upon the particular commercial terms of the swap in question.
Dexia's application was successful: by the autumn of 2002 Dexia was effectively acting as Prato's adviser in this regard. Prato wrote to Dexia on 25 November 2002, formally appointing it to act as Prato's adviser, and Dexia formally accepted the appointment by letter dated 28 November 2002. I shall refer to the agreement thus created as "the 2002 advisory agreement". Both sides agree that the 2002 advisory agreement was validly made. In this judgment I describe and determine issues between the parties as to the legal effect of what was done and not done during the course of the 2002 advisory agreement.
When writing to Dexia on 25 November 2002 Prato also sent a document that it had signed and sealed that day. This was a proposed master agreement based on the ISDA 1992 Multicurrency – Cross Border form, and including a schedule supplementing and amending the form, among other things by incorporating the 2000 ISDA Definitions and the 1998 ISDA FX and Currency Option Definitions. The document set out terms which were to govern interest rate swap transactions between Dexia and Prato, each transaction to be evidenced by a confirmation. This document was signed on behalf of Dexia on 29 November 2002. I shall refer to the agreement thus created as the "master agreement".
The master agreement stated that it and each confirmation together constituted a single "Agreement". Part 4(h) of the schedule to the master agreement stated that the Agreement was governed by and to be construed in accordance with the laws of England. By section 13(b) of the master agreement this had the consequence that each party irrevocably submitted to the jurisdiction of the English courts.
Subsequent interest rate swap transactions ("the swaps") were entered into, each of them evidenced by a confirmation and said to form part of the Agreement contemplated by the master agreement. As explained below, the master agreement and the swaps are now said by Prato to be invalid or not to be enforceable against Prato.
During the period of the 2002 advisory agreement Prato's public debt was restructured, first in 2004 ("the 2004 bond restructuring"), and second in 2006 ("the 2006 bond restructuring"). As part of the 2004 bond restructuring, numerous fixed interest loans initially denominated in lire, which by that time had become denominated in euros, were repaid. Also as part of the 2004 bond restructuring, new bonds were issued in 2004 ("the 2004 bonds"). The 2004 bonds comprised a first tranche of floating rate notes issued on 30 November 2004 in the sum of €27,870,000 ("the November 2004 bonds") and a second tranche of floating rate notes issued on 29 December 2004 in the sum of €37,553,000 ("the December 2004 bonds"). The 2006 bond restructuring extended the maturity of the 2004 bonds.
As to the master agreement and the swaps, Prato admits that documents evidencing them were signed, but contests their validity or enforceability. I said earlier that the master agreement was "created" and that the swaps "were entered into". In this judgment, unless the context otherwise requires, references to the master agreement and the swaps, and to them being created, authorised, approved or entered into, are without prejudice to the questions whether they were valid or enforceable. Similarly I use the language of rights and entitlements, and duties, liabilities and obligations, under the master agreement and the swaps without prejudice to those questions.
The swaps comprised:
(1) on 4 December 2002, an interest rate swap with an initial notional sum of €83,824,626.88 ("swap 1");
(2) on 6 August 2003, an interest rate swap with an initial notional sum of €113,105,592.42 ("swap 2"), which terminated swap 1;
(3) also on 6 August 2003, an interest rate swap with an initial notional sum of €13,055,932.44 ("swap 3");
(4) on 30 December 2004, an interest rate swap with an initial notional sum of €27,870,000 ("swap 4") and an interest rate swap with an initial notional sum of €37,553,000 ("swap 5"); swaps 4 and 5 together terminated swap 2;
(5) on 29 June 2006, an interest rate swap with an initial notional sum of €67,524,044.17 ("swap 6"), which terminated swaps 3, 4 and 5.
All obligations under swaps 1 to 5 were performed by each side as and when those obligations fell due. Netting off of payment obligations under those swaps almost always resulted in a payment by Dexia to Prato. The same was true in relation to swap 6 until 30 June 2009, when Prato started to become liable to make payments to Dexia. On 13 December 2010, Prato wrote to Dexia stating an intention to commence administrative self-redress procedures in relation to swap 6.
Obligations under swap 6 falling due on and from 31 December 2010 have not been met by Prato. In that regard Prato relied initially on self-redress procedures adopted in late December 2010, and subsequently relied additionally on various other defences. On the first day of the present trial Prato noted that its entitlement to rely on the self-redress procedures, while pleaded by way of defence in the present proceedings, had been litigated between Prato and Dexia in the Administrative Court in Italy and had been resolved by that court against Prato. An appeal by Prato is pending in Italy. Nevertheless, Prato said that it acknowledged...
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