Banca Intesa v Venezia: valid or void?
For the first time in the history of the Italian swaps litigation before the English courts, the Commercial Court has ruled that a swap transaction entered into in 2007 between an Italian authority and two Italian banks is void. In Banca Intesa Sanpaolo SPA & Anor v Comune Di Venezia  EWHC 2586 (Comm), Foxton J held that the banks are therefore liable to make restitution. While the court also concluded that a defence of change of position may be available to the banks, it acknowledged the 'potentially profound implications for the sanctity of English law contracts'.
Commune Di Venezia (Venice) claimed that it was not bound by interest rate swaps entered into with Banca Intesa Sanpaolo SpA and Dexia Crediop SpA on the terms of an ISDA 1992 Master Agreement (the Swaps) because it lacked capacity to enter into them. While the Swaps were governed by English law, the question of Venice's capacity to enter into them was governed by Italian law. Venice argued that the 2020 decision of the Italian Supreme Court in BNL v Cattolica1, meant that Venice (in common with all Italian regional authorities) lacked the substantive power to enter into the Swaps. The Commercial Court agreed.
This conclusion is a significant departure from the findings reached by Cockerill J in the recent (and similar) case of Deutsche Bank v Busto Arsizio2, summarised in our article here. In Busto, the Commercial Court interpreted Cattolica as relating to the principles of Italian contract law, and not the authorities' capacity to contract. Accordingly, it found it had no impact on the Swaps which were governed by English law. On very similar facts, the Commercial Court in Venezia has reached a wholly different conclusion.
The Cattolica decision
In Cattolica (in which the derivatives in question were governed by Italian law) the Italian Supreme Court held that Cattolica could enter into derivatives contracts if they were for hedging purposes but not if they were for speculative purposes. There was no explicit formulation of what makes a derivative speculative as a matter of Italian law. While the court considered other aspects of Cattolica, in this article we focus on the question of Venice's capacity and whether or not the Swaps were 'speculative'.
The meaning of Cattolica
In Venezia, Foxton J conducted a detailed analysis of the expert evidence on Italian law, including the banks' argument that the Italian Supreme Court's conclusions in Cattolica were wrong. He concluded that the Italian statutory restrictions on regional authorities entering into speculative transactions meant – as a matter of English law classification - that Italian regional authorities lacked the legal ability or substantive power to enter into contracts for such transactions. It was not simply the case (as per the interpretation in Busto) that Italian law imposed a prohibition on regional authorities exercising their powers to enter into the transactions. This difference in interpretation is fundamental; the Swaps were null and void ab initio, as opposed to being valid contracts governed by English law (in respect of which the Italian law prohibition had no relevance).
The definition of 'speculative'
In Busto, the court found that Cattolica did not apply to issues of capacity. However, it went on to determine that even if that were wrong, the transactions in Busto had been entered into for the purposes of hedging interest rate risks and not for speculative purposes. They were thus permitted. By contrast, in Venezia, the court conducted an analysis of the purpose for which Venice entered into the Swaps and determined it was speculative. It held that Venice entered into the Swaps because it needed to restructure a bond, in particular by lengthening the repayment date by 15 years in order to 'free up' its budget. The court accepted the evidence of Venice's experts that in entering into the Swaps, it undertook significant new risk to which it was not exposed under the bond. It also accepted that the probability of Venice losing money on the Swaps was high. The cumulative effect of these (and other) factors led the court to conclude that the Swaps were predominantly speculative rather than hedging.
Proving foreign law
The question of how foreign law is proved in the English courts is one which has received significant attention recently. One of the ways in which the meaning of foreign law can be established through the English courts is by reference to other decisions of the English courts on the meaning of the foreign law. Giving judgment in Venezia, Foxton J noted that the decision in Busto was not 'strictly binding' on him. However, the findings of fact made in Busto on Italian law could have been admissible as evidence had the banks served a notice under the Civil Evidence Act 1972. The banks placed significant reliance on the Busto decision but without the benefit of a Civil Evidence Act Notice, the Busto decision had no evidential status and the Commercial Court was free to depart from it.
By contrast, in Dexia Crediop SPA v Provincia Di Pesaro E Urbino  EWHC 2410 (Comm) (a judgment given just a month earlier for the second claimant in these proceedings on very similar facts), the Commercial Court followed the judgment in Busto, partly because Dexia served a notice under s4 of the Civil Evidence Act 1972 in relation to it, which made the findings in that case admissible as evidence of Italian law.
Contractual estoppel and capacity
The banks' secondary argument, namely that if the swaps were deemed to be void, Venice would be estopped from relying on a lack of capacity because of the representations and warranties in the ISDA Master Agreement, also failed. Strictly speaking, the court concluded that the issue of whether Venice had capacity to 'promise' that it had capacity was a matter of Italian law. However, as the court was not referred to Italian law evidence on the question, the legal argument was conducted by reference to English case law and commentary. The court held this did not assist the banks. The decision in Credit Suisse v Vestia3 (in which an estoppel argument succeeded in similar circumstances) did not support the banks' estoppel argument here. In that case, the ISDA Master Agreement set a framework for future transactions to be entered into over a period of time. By contrast, the Venice ISDA Master Agreement was, essentially, entered into at the same time as (and solely for the purpose of) the Swaps. In those circumstances, the court held that Venice could not be estopped from contending that the transaction was a speculative one, as that would amount to it promising it had capacity, which in fact it lacked. The court noted that the same conclusion had been reached in Busto (although for slightly differing reasons) and that in that case, Cockerill J had held that, had it been necessary, she would have been prepared to depart from the decision in Vestia in any event.
Restitution and the change of position defence
The applicable law of Venice's restitution claim was found to be English law, as the law of the country with the closest and most real connection with the transactions (a decision also reached in Busto). As Italian law does not recognise a 'change of position' defence, this was plainly welcomed by the banks.
While acknowledging that he was entering 'treacherous terrain' in reaching judgment on the issue, Foxton J held that the banks were, in theory, able to rely on a change of position defence in relation to the back-to-back hedging swaps they entered into in connection with the Swaps. The court considered, but dismissed, the following principle grounds of challenge, derived from previous case law, that the defence is not available where:
- restitution is sought because a condition for conferring the benefit has not been satisfied;
- the change of position occurred before receipt of the payments for which restitution was sought;
- payments were made because of a legal liability to do so;
- the recipient cannot (yet) establish whether or not they were worse off because of their change of position.
Foxton J concluded (following extensive analysis of how the defence of 'change of position' has evolved since its inception4), that there was no reason why it should not be available in this case. In entering into the back-to-back hedging swaps, the banks had assumed conditional payment obligations in anticipatory reliance of receiving (essentially) the same payments from Venice. There had been no bad faith or illegality; on the contrary the entry into the back-to-back hedging swaps had been routine and objectively foreseeable. This fulfilled the necessary requirements for establishing a change of position defence. In reaching that decision, the court acknowledged that it was not following a number of first instance authorities5. However, Foxton J held that the reasoning in those first instance cases could not survive developments in the law of unjust enrichment over the subsequent 25 years. He also derived support from Cockerill J's assessment, on an obiter basis, that she would not have followed those judgments if the issue had arisen.
While the court found the defence was available, quantification of the value of the claim (and any defence) remains to be carried out. Net payments by Venice under the swaps at the date restitution was sought were €71,995,659.95. In determining that a change of position defence was available, Foxton J noted that this "tempers at least some of the consequences which would otherwise flow from a legal development in 2020 leading to a transaction which both parties had treated as binding for nearly 13 years being held to be void from the outset."
What does this judgment mean for the future of swaps litigation?
Italian regional authorities are currently pursuing many claims for restitution relating to similar swap transactions before the Italian and English courts. The decision in Cattolica has been followed by four subsequent decisions of the Italian Supreme Court6 and, as Foxton J noted in Venezia, there is nothing to suggest that the Italian Courts are experiencing any “buyer’s remorse” at the significant changes in Italian law effected by Cattolica. However, while the regional authorities have had recent success in Italy, the 2021 decision in Busto led to a number of settlements of such claims, notably by the Sicilian regional authority. Now that the Commercial Court has concluded that in fact, Cattolica does relate to the capacity of such regional authorities to enter into swap transactions, this is likely to have a significant impact on future litigation.
Foxton J himself was also clearly conscious of the impact of this decision, noting that he had reached his conclusion with 'some diffidence'. In particular, he expressed concern on the impact of foreign law decisions on questions of capacity for the enforceability of English law contracts:
"There may be room for a legitimate debate as to whether, when the issue arises before an English court, the security of obligations governed by English law should be capable of being subject to a continuing jurisprudential jeopardy of this kind arising from the courts of the domicile of one of the contracting parties."
1 Banca Nazionale del Lavoro S.p.A v Commune di Cattolica n. 8770 2020
2 Deutsche Bank AG London v Comune di Busto Arsizio  EWHC 2706 (Comm)
3 Credit Suisse International v Stichting Vestia Groep  EWHC 3103 (Comm)
4 Lipkin Gorman v Karpnale Limited  2 AC 548, 558, and 580
5 Westdeutsche Landesbank Girozentrale v Islington LBC  4 All ER 890 and South Tyneside MBC v Svenska International plc  1 All ER 545
6 Decisions Nos 2157/2021, 21830/2021, 24014/2021 and 8603/2022