The Court of Appeal has overturned the Commercial Court’s decision on the validity of an interest rate swap transaction between an Italian authority and two Italian banks. In Banca Intesa Sanpaolo Spa & Anor v Comune Di Venezia  EWCA Civ 1482, the appeal court ruled that the swaps between Banca Intesa Sanpaolo SPA and other banks, and Comune Di Venezia (Venice) were valid and binding, reversing the first instance decision.
The decision will be welcomed by banks, given its conclusion that the English law swaps are valid and enforceable. However, the way in which the court reached this conclusion may still cause concern. In particular, this judgment potentially opens the way for findings of fact (or meaning) on foreign law to be overturned on appeal.
While the Court of Appeal declined to consider the ‘difficult, albeit interesting’ question of whether decisions of a foreign highest court should be given retrospective effect, the judgment provides valuable commentary on the English courts’ approach towards the interpretation of foreign law. It also refines the court’s approach to knowledge of a mistake of law (including foreign law) under s32 of the Limitation Act. Finally, the judgment clarifies the law of restitution and the availability of the defence of change of position.
The Court of Appeal’s central conclusion was that the swaps were not ‘speculative’ (and thus not impermissible under Italian law). While the decision is specific to its facts, the key findings have broader relevance. Of note:
This claim is one of a series brought by Italian banks in the English courts seeking declarations that interest rate swap agreements with Italian regional authorities, on the terms of ISDA Master Agreements, are valid.
The claims are in response to assertions by the Italian authorities that, following the 2020 decision of the Italian Supreme Court in BNL v Cattolica, the authorities lacked the power to enter into the swaps, entitling them to restitution on the grounds of invalidity. Although the swaps are governed by English law and subject to the jurisdiction of the English courts, the question of capacity is governed by Italian law. Following a series of first instance decisions determining that the swaps are valid, Mr Justice Foxton ruled, at first instance, that the swaps were void and unenforceable. The banks appealed to the Court of Appeal on the following key grounds:
Venice appealed on the grounds that:
The Court of Appeal ruled that the banks’ primary ground of appeal was successful. It held that the trial judge had wrongly concluded that the swaps were entered into for speculative and not hedging purposes. As a result, Italian law did not operate to invalidate Venice’s entry into them. Nonetheless, the court considered the other grounds of appeal and conducted a detailed analysis of the proper approach to determining questions of foreign law, both at first instance and on appeal.
Fundamentally, the Court of Appeal found that the trial judge made a ‘root error’ in concluding that the swaps were speculative. It agreed with the banks’ interpretation of the swaps as valid contracts which amounted to hedging. It placed significant weight on the fact that the original Bear Stearns swap (on which the swaps were based) was a valid, hedging contract. The Court of Appeal concluded that Mr Justice Foxton’s analysis on this point was wrong and that it was permitted to ‘interfere’ on this finding on foreign law and overturn it.
Additionally, the Court of Appeal held that the approach to foreign law was also incorrect. The judge had reached his decision by applying Italian law to the facts, instead of evaluating expert evidence on Italian law. This meant the Court of Appeal had even greater scope to ‘interfere’ in the first instance decision. Finally, the Court of Appeal held that even if the judge had based his decision on expert evidence, it was still the wrong approach because he had analysed Italian first instance and lower court decisions (and considered English decisions) instead of evaluating what would have been the decision of the highest Italian court on the issue. As to that question, the Court of Appeal determined that the Italian Supreme Court had answered it in its judgment in BNL v Cattolica.
While Mr Justice Foxton’s analysis is described as ‘impressive and well-reasoned’, the appeal court still considered it to contain errors of principle and method. Ultimately, all three appeal judges disagreed with this interpretation of Italian law and so it was set aside. Had the judgment been based more on expert evidence (and not on the judge’s own assessment of Italian law), the court indicated it might still have set the judgment aside because in its view, the judge had failed to interpret the decision of the Italian Supreme Court correctly.
From a practical perspective, this judgment emphasises the importance of adducing the best possible expert evidence on foreign law at trial. It is also noteworthy that in this litigation, despite previous English decisions on similar points, the parties had not served notices under s4 of the Civil Evidence Act 1972, which could have made the findings in previous cases admissible as evidence of Italian law.
While not required to rule on the point, the Court of Appeal observed that the judge’s analysis of the impact of the FII decision to this case was incorrect. It held that Venice knew enough to bring its claim by 2010, the date at which many other Italian regional authorities had brought their claims. Its counter claim for restitution was therefore time barred. The fact that the English courts rejected those earlier claims (including in Dexia Crediop SpA v Comune di Prato  EWHC 1746 (Comm)) and that the Italian Supreme Court’s decision in 2020 might affect the English courts’ approach was irrelevant. The moment at which Venice should have been aware it had a worthwhile claim was in 2010 when a very similar claim was issued by another Italian municipal body.
The first instance decision set alarm bells ringing. As Mr Justice Foxton himself recognised, subjecting the security of an agreement governed by English law to ‘a continuing jurisprudential jeopardy’ by decisions of foreign courts, was a significant concern. The decision by the Court of Appeal removing that jeopardy and emphasising security of contract under English law will therefore be a welcome one. As the UK takes its first steps towards joining the Hague Judgments Convention, this judgment highlights why so many commercial parties (particularly in the financial sector) still favour the choice of English law and jurisdiction in their contracts.
This article was co-written with Harriet Campbell, senior knowledge lawyer, and Iona Todd, trainee solicitor in the commercial dispute resolution team.