Case No: 2009 FOLIO 861 & 862
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE HAMBLEN
Between :
DEPFA BANK PLC | Claimant |
- and - | |
PROVINCIA DI PISA | Defendant |
AND | |
DEXIA CREDIOP S.p.A. | Claimant |
- and - | |
PROVINCIA DI PISA | Defendant |
Mr Richard Handyside QC (instructed by Allen & Overy) for the Claimants
Mr Jonathan Davies-Jones (instructed by DLA Piper UK LLP) for the Defendant
Hearing dates: 11th May 2010
Judgment
Mr Justice Hamblen :
Introduction
The Claimants Depfa Bank plc and Dexia Crediop SpA are Irish and Italian banks. The Defendant is an Italian local public body.
The Claimants sue the Defendant in respect of two interest rate swap agreements (“the Swap Contracts”). They assert jurisdiction under Art. 23 of the Judgments Regulation on the grounds that the Swap Contracts contain an English court jurisdiction clause. The Defendant challenges jurisdiction on the basis that both actions are “principally concerned” with matters over which the courts of Italy have exclusive jurisdiction by virtue of Art. 22(2) of the Judgments Regulation. That is because the Defendant’s decisions to enter into the Swap Contracts were allegedly invalid.
Factual background
In September 2006, the Defendant launched an unofficial tender process to restructure its indebtedness in a maximum amount of EUR 99,870,000. As appears from the call for tender, the Defendant’s aims were (1) to reduce the annual instalments for the repayment of its existing loans, (2) to revise the interest rate applying to its existing debt, through innovative financial instruments with predetermined risk profiles and amounts, and (3) to take advantage of the then favourable long term interest rates. The Claimants submitted a bid to the Defendant.
On 23 January 2007, the Province Council of the Defendant resolved, among other things, to enter into a debt restructuring transaction that had been proposed by the Claimants whereby the Defendant would undertake a bond issue. The bonds would pay interest at a floating rate of EURIBOR + 0.063%, and the Defendant would enter into a derivative instrument in order to protect itself against future interest rate rises. The recitals to the resolution referred expressly to (among other things) Article 41 of Law 448/2001 and to the Ministry of the Economy decree 389/2003, as well as to the fact that the Claimants’ proposal had been considered by a Technical Commission that had been set up by the Defendant in order to evaluate the bids received.
By an Executive Decision dated 16 February 2007, the Director (or Chief Financial Services Officer) of the Defendant, Paola Fioravanti, resolved (among other things) to assign the debt restructuring operation to the Claimants in accordance with the Province Council’s resolution dated 23 January 2007.
On 7 June 2007, the Province Council resolved (among other things) to approve the issue of a bond for the maximum nominal amount of EUR 100,000,000, maturing in 2024 and paying a floating annual interest rate of 6 month EURIBOR plus 0.063%, and to approve the Claimants as underwriters of the bond. In addition, the Council resolved “to complete financial derivative transactions against the said bond loan for the purpose of covering interest rate risk, in compliance with provisions contained in Article 41, Law no. 448 of 28 December, 2001, in Ministerial Decree 389/2003 and in the 2007 Finance Law.”
The Council also acknowledged that the transaction documents would be forwarded, prior to their execution, to the Treasury Department of the Ministry of Economy and Finance.
By an Executive Decision dated 22 June 2007, the Director (Ms Fioravanti) resolved definitively to award the bond transaction, as well as completion of the derivative financial instrument transactions, to the Claimants on a 50:50 basis. By a further resolution dated 3 July 2007, the Director resolved (essentially) to approve the entering into of interest rate swaps with the Claimants which, at the request of the Defendant, were structured so that they would cap the Defendant’s interest rate exposure under the bond at 5.99%. The Director expressly acknowledged (at paragraph 9 of the resolution) that the swap transactions were in line with Ministerial Decree 389/2003.
On 28 June 2007, the Defendant issued floating rate notes named “Provincia di Pisa 2007-2014 a tasso variabile” in an amount of EUR 95,494,000 (“the Bond”). The Bond had a scheduled maturity date of 2024, with the option of early repayment by the Defendant without incurring a penalty.
On about 4 July 2007, the Defendant entered into the Swap Contracts with the Claimants. The effect of the Swaps Contracts is equivalent to imposing a cap and a floor on the amount of interest that the Defendant has to pay in respect of the Bond between June 2007 and December 2024. The cap is set at 5.99%, the floor at 4.64%. Thus where EURIBOR exceeds 5.99%, the Claimants must pay the Defendant an amount by which the EURIBOR rate exceeds 5.99% multiplied by the notional amount under the relevant swap (the Swap Contracts are structured such that the notional amounts under the swaps from time to time will equal the notional amounts then outstanding under the Bond). Conversely, where EURIBOR is less than 4.64%, the Defendant must pay the Claimants an amount by which EURIBOR is below 4.64% multiplied by the notional amount under the Swap Contracts.
The Swap Contracts are documented as follows:
The terms of the swap between Depfa and the Defendant are contained in an ISDA Master Agreement dated as of 15 June 2007, a Schedule to the Master Agreement and a confirmation dated 5 July 2007.
The terms of the swap between Dexia and the Defendant are set out in an ISDA Master Agreement dated as of 4 July 2007, a Schedule to the Master Agreement and a confirmation dated 4 July 2007.
The parties expressly chose English law to govern the Swap Contracts. The Swap Contracts also contain English jurisdiction clauses, which confer exclusive jurisdiction upon the English courts so far as proceedings within Member States are concerned.
The parties initially operated the Swap Contracts in accordance with their terms. During the period 28 June 2007 to (but excluding) 28 December 2007, the EURIBOR rate was such that Depfa and Dexia were obliged, under the Swap Contracts, to pay the Defendant EUR 12,986.39 and EUR 11,285 respectively on 28 December 2007. The Claimants made those payments, and the Defendant accepted them.
On the next two payment dates (28 June 2008 and 28 December 2008), EURIBOR was above the floor but below the cap. Consequently, no party was obliged to make any payment to any other under the Swap Contracts.
However, on 23 December 2008, EURIBOR was fixed in respect of the next 6 month calculation period commencing on 28 December 2008. The Defendant was in a position to know from this date that it would be obliged to make payments to the Claimants on 28 June 2009.
By a letter dated 5 June 2009, the Director-General of the Defendant, Mr Palagi, wrote to the Claimants challenging the enforceability of the Swap Contracts. In the letter, Mr Palagi made the following points:
He reserved “every right” under the Swap Contracts, and made reference to what he asserted were well-known economic difficulties that had affected Depfa.
He claimed that an analysis of the Swap Contracts had revealed that there was an imbalance between the value of the cap purchased by the Defendant and the floor sold by it. Mr Palagi claimed that this imbalance amounted to EUR 638,500 (on a mid-market basis) in the Claimants’ favour, and that the failure by the Claimants to pay this amount to the Defendant represented “an implicit cost of the transaction that is unacceptable for the Authority I represent.”
He complained that the Claimants had never disclosed that the Swap Contracts had had this implicit cost, and that this cost wiped out the economic benefit (or ‘economic convenience’) of the Bond transaction, “with every consequent effect on the validity of the transaction in question.”
He asserted that the (alleged) negative value of the Swap Contracts was contrary to Article 3 of Ministerial Circular of 27 May 2004, because the Circular only permitted caps and floors where the floor was sold solely to finance the acquisition of the cap. This was contended to mean that the value of the cap bought had to be equal to the value of the floor sold.
He asserted that, in view of the matters referred to above, the Swap Contracts were “divorced from their original purpose (namely hedging the interest rate risk) and transformed ... into transactions which were also of a merely speculative nature...”.
He asserted that in the absence of a framework contract between the Claimants and the Defendant setting out the nature of the services to be provided by the Claimants, the Swap Contracts were null and void.
He asserted that the Claimants had acted in breach of a number of regulations which, he suggested, “may have contributed to causing a major and very serious loss for the Authority”. The obligations under the regulations that were alleged to have been infringed included “duties of diligence, propriety and transparency in the customers’ interest and for market integrity, obligation to acquire all necessary information from customers and to operate in a manner so that they are always adequately informed.”
Finally, he concluded his letter by requesting the immediate writing-off of the Defendant’s debt and by warning the Claimants against claiming payment of the next six-monthly amount due. He invited the Claimants to contact the Defendant within 5 days, failing which the Defendant would take “every appropriate legal measure to protect the interests and rights of the Province of Pisa.”
The Claimants subsequently met the Defendant, but the Defendant continued to indicate that it would not make any payments due from it under the Swap Contracts.
In view of these developments, the Claimants each issued proceedings against the Defendant on Friday 26 June 2009. At that point, no sums were due and payable to the Claimants under the Swap Contracts (the next payment date was 28 June 2009) and the relief claimed was accordingly limited to declaratory relief.
The issue of the proceedings apparently came to the attention of the Defendant almost immediately. On Saturday, 27 June 2009, Mr Vulcano telephoned Mr Baratella of Dexia and informed him that the Defendant was aware that proceedings had been commenced by the Claimants.
By an Executive Decision taken on the next working day, Monday 29 June 2009, the Director, Ms Fioravanti, purportedly resolved to cancel, with retroactive effect, her decisions of 16 February 2007, 22 June 2007 and 3 July 2007 insofar as they related to financial derivatives instruments (i.e. the Swap Contracts). This purported revocation by the Defendant of previous resolutions was carried out pursuant to a power of self-redress available to the Defendant, as an Italian public body, under Article 21 of Law 241/1990. Article 21-octies of Law 241/1990 provides:
“1. Any administrative provision that is adopted in breach of a law or that is vitiated on the grounds of ultra vires or a lack of competence may be declared void.”
Article 21-nonies of Law 241/1990 provides:
“1. An administrative measure, that is illegitimate pursuant to article 21-octies, may be cancelled officially, if the public interest reasons apply, within a reasonable period of time and taking the interests of both the intended recipients and any opposed parties into account, by the authority that issued it or by another authority indicated by law.”
The first two pages of the Executive Decision rehearsed various matters. On the second page, reference was made to certain analyses of the Swap Contracts which, it was said, highlighted (alleged) breaches of certain laws, namely (1) Article 41 of Law 448/2001, on the basis that the Swap Contracts did not have an initial value equal to zero, and (2) article 3 of the Ministerial Circular dated 27 May 2004, on the basis that the value of the cap was lower than the value of the floor.
The Executive Decision continued:
“That the above mentioned breaches were due to the so called implicit costs of the stipulated swap, and, as such, could not be calculated by the Province of Pisa, unless they had been disclosed by the banks which proposed the derivative;
That, moreover, if the Province of Pisa had had full information about the interest rate swap operation, the decision regarding whom to award the operation to would have been different to that made with the information provided.”
Paragraph 5 of the Executive Decision stated that in order to oppose the Decision, it was possible to file an administrative appeal with the Defendant within 30 days of the publication date, or to file a jurisdictional appeal with the Regional Administrative Court of Tuscany within 60 days of the publication date, or to file an extraordinary appeal with the President of the Republic, on grounds of legitimacy only, within 120 days.
On 30 June 2009 and 2 July 2009 respectively, Depfa and Dexia served notices on the Defendant in respect of its failure to pay the amounts due under the Swap Contracts on 28 June 2009.
By a further Resolution dated 15 July 2009, the Province Council resolved (among other things) to cancel its resolution dated 23 January 2007 insofar as it related to the Swap Contracts. Like the Executive Decision taken on 29 June 2009, this Resolution was also purportedly taken under the power of self-redress under Article 21 of Law 241/1990.
The Province Council noted by its first resolution taken on 15 July that violations of Article 41 of Law 448 of 2001 and of Article 3 of the Ministerial Circular dated 27 May 2004 had occurred. By its second resolution, the Province Council noted that “the violations indicated above are due to the implicit costs of the operation, which cannot be calculated by the Province of Pisa unless they are indicated by the banks proposing the operation... .”
On 23 September 2009, the Claim Forms were amended to include money claims (amendments were also made to the declarations sought). The Claim Forms were subsequently served out of the jurisdiction on the Defendant on 30 October 2009.
On 29 September 2009, the Province Council further resolved to revoke its resolution dated 7 June 2007. The Province Council noted by its first resolution that the procedure for identifying the debt restructuring operation contained breaches of Article 41 of Law 448/2001 and of Article 3 of the Ministerial Circular dated 27 May 2004, and that these breaches were due to the implicit costs in the transaction “which could not be calculated by the Province of Pisa unless they were declared by the banks proposing the transaction ...”.
Meanwhile, on 12 October 2009, the Claimants commenced proceedings against the Defendant in the Administrative Court for the Region of Tuscany (“the Italian Administrative Proceedings”) challenging the Executive Decision taken by Ms Fioravanti on 29 June 2009. The Claimants’ evidence is that they had little option but to commence proceedings in the Administrative Court for the Region of Tuscany, because if they had not done so, the Executive Decision would have become unchallengeable, and there would have been a risk that a civil judge would have had to assume (at least under Italian law) that the initial decisions to enter into the Swap Contracts had been legitimately revoked.
In the Italian Administrative Proceedings the Claimants seek to annul the Executive Decision of 29 June 2009 and the Resolution of the Province Committee dated 15 July 2009. Secondly, they seek damages “suffered and likely to be suffered by the [Claimants] due to the illegality of the challenged orders.”
The Claimants’ evidence is that this is not a claim for damages for breach of the Swap Contracts. The Claimants’ position in the Italian Administrative Proceedings is that the Administrative Court has no jurisdiction over the Swap Contracts, because the English courts have exclusive jurisdiction.
The alleged violations of law involved in the Defendant’s decisions to enter the Swaps
The Defendant contends that its decisions to enter into the Swap Contracts were invalid because they violated prohibitions imposed by Italian public law (namely Art. 41 of the Financial Law 448/2001 and Art. 3 of the Ministerial Decree 389/2003) with the result that the Defendant acted outside its capacity and/or in excess of its powers.
As to Art. 41 of the Financial Law 448/2001, the Defendant’s case can be summarized as follows:
Pursuant to Art 41.2 arrangements to restructure debt can only be entered into by Italian local public bodies if the arrangements satisfy the condition at the end of Art 41.2. This condition is referred to in Italian law as the requirement for “economic convenience”.
TheArt 41.2 requirement for “economic convenience” constitutes a substantive limitation on the power of Italian local public bodies to enter into debt restructurings in circumstances engaged by Art 41.2. They have no power to enter into such arrangements unless there is “economic convenience” at the time of entry.
In 2007, when the decisions to restructure the debt were taken by the Defendant, it considered the requirement for “economic convenience”. It concluded in its decision of 23 January 2007 that the restructuring (including the Swap Contracts) would result in a saving (i.e. a reduction in the total liability) of approximately EUR 530,000. In fact, and subject to the points made below, it contends that by July 2007 the reduction in liability would have been slightly lower at EUR 409,999.
In 2009, however, the Defendant had the Swap Contracts professionally analysed as at their date of entry. Contrary to the saving which the Defendant says that in 2007 it understood the restructuring would generate, the professional analysis in 2009 established that, as at the date of their entry, the Depfa Swap had a negative value to the Defendant of EUR 741,502 and the Dexia Swap had a negative value to the Defendant of EUR 644,355. The combined negative value to the Defendant as at the date of entry wasEUR 1,385,857. The existence of these negative values was unknown by the Defendant and not taken account of in its assessment of “economic convenience” at the time.
Accordingly, as at the date of entry, the Swap Contracts represented and generated an increase, rather than a saving, in the Defendant’s total liabilities. The negative values of the Swap Contracts exceeded and extinguished the savings which had been calculated. And, as a result, the requirement for “economic convenience” under Art. 41.2 was not satisfied.
Because there was no “economic convenience”, Pisa’s decision to enter into the Swap Contracts was as a matter of Italian law unlawful and contrary to the limitation on its substantive powers contained in Art 41.2.
As to Art. 3 of the Ministerial Decree 389/2003, the Defendant’s case can be summarized as follows:
Ministerial Decree 389/2003 sets out rules for the Italian local public bodies on access by them to the capital markets. The decree was made pursuant to the power in Art 41.1 of the Financial Law 448/2001 to lay down rules, inter alia, for the way derivatives could be used by such local public bodies.
Ministerial Decree 389/2003 has been the subject of explanation by a Ministerial Circular dated 27 May 2004. As a matter of Italian statutory construction, the Ministerial Circular dated 27 May 2004 is of very persuasive authority.
The rules in Ministerial Decree 389/2003 (as explained in the Ministerial Circular dated 27 May 2004) constitute further limitations on the substantive powers of local public bodies to enter into derivatives. In particular, a local public body was only permitted to enter interest rate swaps ‘selling’ a floor if and to the extent that such a sale financed the ‘purchase’ of a cap. The local public body had no power to enter into an interest rate swap selling a floor which had a greater value to the counterparty than the cap which was being purchased had to the local public body.
The relevant extract from Art. 3 of Ministerial Decree 389/2003 provides:
“2. In addition to the transactions mentioned in paragraph 1 of this article…the following derivative transactions are also allowed:
d) purchases of interest rate “collars” in which the buyer is guaranteed that the interest rate charged to them will oscillate between a pre-established minimum and a pre-established maximum”.
The relevant extract from Ministerial Circular dated 27 May 2004 provides:
“The acquisition of the collar also implies the acquisition of a cap and the contextual sale of a floor, permitted solely for the purpose of financing the protection against rising interest rates provided by the purchase of the cap.”
The Defendant contends that it follows from the negative values inherent in the Dexia and Depfa Swap Contracts at the time they were entered into that the floor sold by the Defendant was more valuable to Dexia and Depfa than the cap which was being purchased by the Defendant was to it. There was no equilibrium or balance. Accordingly, the Swap Contracts infringed the prohibition on ‘selling’ a floor other than to purchase a ‘cap’.
Because of that, the Defendant’s decision to enter into the Swap Contracts was unlawful as a matter of Italian law and contrary to the limitation on its substantive powers contained in Art. 3 of the Ministerial Decree 389/2003.
The Claimants contend that the Defendant’s allegations of violations of law are without substance.
So far as Article 41.2 of Law 448/2001 is concerned, the Claimants contend that derivatives do not constitute indebtedness and therefore do not fall to be taken into consideration under the ‘economic convenience’ test. This is said to be made clear by, among other things, a Ministerial Circular of 22 June 2007 which, after referring both to Article 41.2 of Law 448/2001 and to Ministerial Decree 389/2003, states in terms that derivatives are not classifiable as borrowing but rather as debt management instruments. To similar effect is Ministerial Circular 389/2003. The Defendant’s Italian law expert, Mr Vulcano, accepts that Ministerial Circulars are “always of very persuasive authority”.
The Claimants further contend that the Swap Contracts were entered into after the Bond and cannot be regarded as intrinsic to it. The point is most clearly illustrated by the fact that the Defendant has regarded itself as able to revoke the decisions to enter into the Swap Contracts without revoking the decisions to enter into the Bond. If, as the Defendant contends, the derivatives were central to the Bond, the Claimants submit that it is very difficult to see how, on the facts now alleged by the Defendant, it would not be incumbent upon the Defendant to revoke its decisions to enter into the Bond given that, on its case, the economic equivalence test in relation to that entire transaction was not satisfied.
As for Article 3 of Ministerial Decree 389/2003, the Claimants submit that the same points arise under the Ministerial Circulars. Furthermore, the wording of the Decree does not require a numerical equivalence between the values of the cap and the floor. The rationale behind the relevant part of the Decree is to ensure that entities do not sell floors unless they are purchasing a cap.
I have set out the parties’ cases on the alleged violations of law in some detail in order to make clear the nature and ambit of the dispute between them as to the alleged invalidity of the decisions of the Defendant. Notwithstanding the Claimants’ case that the allegations made are flimsy, they recognise that the Defendant’s evidence makes out a good arguable case on the issue.
The central question:
Does the Italian Court have exclusive jurisdiction over these Claims by virtue of Article 22(2) of the Brussels I Regulation?
Art. 22(2) of the Brussels I Regulation provides as follows:
“The following courts shall have exclusive jurisdiction regardless of domicile:…2. in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat”.
The words “in proceedings which have as their object” are to be construed as “in proceedings which are principally concerned with” as made clear in the recent Court of Appeal decision in BVG v JP Morgan [2010] EWCA Civ 390 at [83]. Such a construction brings Art. 22(2) into line with Art. 25 of the Judgments Regulation, which provides that:
“Where a court of a Member State is seised of a claim which is principally concerned with a matter over which the courts of another Member State have exclusive jurisdiction by virtue of Article 22, it shall declare of its own motion that it has no jurisdiction.”
The Court of Appeal’s analysis of Art 22(2) in BVG v JP Morgan (particularly [21], [35-37], [83]-[90] and [99]-[106]) supports the following approach:
Because Article 22 is one of the Articles on jurisdiction which creates an exception to the general rule of jurisdiction set out in the Regulation it must not be given an interpretation that is broader than is required by its objective [35].
The objective of Article 22 is, in the interests of the sound administration of justice, to ensure that jurisdiction rests with the courts which are closely linked, in fact and law, with the proceedings and to avoid conflicting decisions being given as regards the existence of a relevant entity or as regards the validity of the decisions of its organs [36, 37].
In considering whether or not Art. 22(2) issues are raised the Court must consider the nature of both the claim and any defences [21];
For Art. 22(2) to be engaged, the question is whether or not the action is “principally concerned” with an Art. 22(2) issue or issues – see [83];
What is called for is an exercise in “overall classification” and the making of an “overall judgment” [86]. This involves a consideration of whether it is clear that granting jurisdiction to the courts of the relevant state will result in the sound administration of justice, which is only likely to be the case if the proceedings are so closely connected with matters of internal decision making by the relevant entity that they should not be tried anywhere but in the Courts of the state of its seat [86]. The Defendant accepted that this Court is bound by the Court of Appeal’s approach to Art. 22(2) but reserved its position if this matter goes further.
The Claimants submit that five issues arise in relation to Article 22(2):
First, when considering whether Article 22(2) applies, should the Court consider only the nature and scope of the claim, or should it also have regard to the Defendant’s intended defence?
Secondly, does Article 22(2) apply to a public law body such as the Defendant, where an issue is raised before a civil court as to the effectiveness of a resolution or resolutions of the Defendant?
Thirdly, is Article 22(2) concerned only with internal disputes within the company or entity?
Fourthly, does the violation of law issue raised by the Defendant fall within Article 22(2)?
Fifthly, are these proceedings principally concerned with matters falling within Article 22(2)?
The first and third issues
The first and third issues were raised by JPMorgan in JPMorgan v BVG and were rejected by the Court of Appeal. The Claimants accept that this Court is bound by the Court of Appeal on these issues, but reserve their position if this matter goes further.
The fourth issue: does the issue raised by the Defendant fall within Article 22(2)
In defence to the Claimants’ claim for enforcement of the Swap Contracts the Defendant contends as follows:
The decisions to enter into the Swap Contracts were invalid because made in breach of Article 41.2 of Financial Law 448/2001 and/or of Article 3 of Ministerial Decree 389/2003;
In the light of those breaches the relevant decision making resolutions were properly cancelled pursuant to Article 21-octies and nonies;
In the light of (1) and/or (2) as a matter of Italian law the Defendant did not have capacity to conclude the Swap Contracts;
In any event, in the light of (1) and/or (2) the entering into the Swap Contracts was outside the powers of the Defendant and therefore ultra vires.
It is clear that at least (1) and (2) involve an issue as to the validity of the decision made by an organ of the Defendant. The Claimants submit that this is not so because, even if those decisions were invalid, the Defendant has no arguable case that this would affect the capacity of the Defendant to enter into the Swap Contracts or that in doing so the Defendant was acting ultra vires. They accordingly submit that there is no real issue as to the validity of the decisions made.
The Claimants rely on Mr Danusso’s evidence that
Local authorities have full capacity to manage their assets pursuant to Article 114 of the Italian Constitution, and have full general capacity to enter into swaps;
Article 41.2 of Law 448/2001 and Article 3 of Ministerial Decree 389/2003 stipulate certain characteristics that contracts entered into by public authorities should have. Violation of these stipulations does not give rise to capacity issues, but instead potentially goes to the enforceability of the contracts.
The Claimants further submit that persuasive evidence of whether the alleged violations of law go to capacity or enforceability is provided by the contemporaneous documents, namely the Defendant’s letter to the Claimant dated 5 June 2009, and the 2009 Executive Decision and Province Council Resolutions, since they are based on allegations of breaches of the law rather than of ultra vires.
Mr Vulcano disagrees with Mr Danusso. His evidence is that Italian public bodies have capacity to act but only according to the laws and usages recognised by Italian public law; Financial Law 448/2001 and Ministerial Decree 389/2003 restrict the capacity of Italian public bodies to enter into contracts, and that cancelling a resolution to execute a contract deprives public body of any capacity it might otherwise have to enter into the contract and renders the contract invalid ex tunc.
It is clear that there are significant differences between the Italian law experts as to whether the capacity of the Defendant to contract would be affected by the alleged violations of law involved in the Defendant’s decision to enter into the Swap Contracts and/or the purported annulment of those resolutions. I accept that the Defendant has a good arguable case of lack of capacity for the reasons set out in paragraphs 34 to 36 of Mr Vulcano’s second witness statement. The non-binding decisions of the Marsala Court of Accounts and the Tribunal of Bologna upon which the Claimants placed particular reliance rely do not compel a contrary conclusion. Further, neither of them address the effect of an annulment decision under Article 21-octies and nonies. In any event, I accept that the Defendant has a good arguable case of ultra vires based on it exceeding its powers – see, by analogy, Haugesund Kommune v Depra ACS Bank [2009] EWHC 2227.
The fifth issue: are these proceedings principally concerned with an Article 22(2) issue?
There is an obvious difficulty in identifying, at this early stage of the proceedings, that with which the proceedings are principally concerned. As Mance J said in Grupo Torras SA v Al-Sabah [1995] 1 Lloyd’s Rep 374, 404:
“The very early stage at which the proceedings have, necessarily, to be classified for the purposes of art. [22] involves another problem. There is, obviously, some risk that parties will seek to shape the Court’s view of the proceedings for jurisdictional purposes by, consciously or unconsciously, displaying part of their hand and underplaying other elements. In the present case the plaintiffs have had to disclose very fully the nature and basis of their case in their points of claim as well as in the affidavit evidence filed on the application for leave to serve out of the jurisdiction. But there have been no pleadings from the defendants, although there are various statements on affidavit and documents from which indications of their attitudes on certain aspects may be gathered...”
The Claimants accordingly submit and I accept that, on applications of the sort being made here, the Court should be alive to the risk of applicants displaying only part of their hand in order to wrest jurisdiction away from the contractually chosen forum in favour of their home court.
The Court’s task is to assess as best it can on the material before it whether the proceedings are likely to be “principally concerned” with an Article 22(2) issue.
The Defendant submits that the proceedings are “principally concerned” with the validity of its decisions. The Claimants seek to enforce the Swap Contracts. The defence to the actions is that the decisions to enter the Swap Contracts were outside the Defendant’s capacity and/or in excess of its powers. Those are essentially two sides of the same coin. The meat of the proceedings would be the defence. If the defence succeeded, the claims would necessarily fail without further factual enquiry. Conversely, if the defence failed, the Claimants would be entitled to the relief claimed again without further factual enquiry.
I accept that the validity of the Defendant’s decisions is an issue and indeed an important issue in the proceedings. However, even on the Defendant’s stated case, there are further issues which arise which strictly speaking do not involve an issue as to the validity of its decisions, but rather its capacity or power to enter into the Swap Contracts if the decision to do so was invalid and the legal consequences of any such lack of capacity or power (Issues (3) and (4) referred to in paragraph 46 above).
More importantly the Claimants submit that there is evidence that the Defendant’s ultra vires defence will not be the only defence put forward in defence to the Claimant’s claim. In particular:
in its initial letter dated 5 June 2009 the Defendant asserted that:
the Claimants had not declared or indicated (ie. disclosed) that the Swap Contracts had an implicit cost;
the Swap Contracts were null and void due to the absence of a valid framework contract;
the Claimants were in breach of a number of regulations which may have contributed to causing a major loss to the Defendant.
In addition, the Defendant was at pains to “reserve every right” in relation to the Swap Contracts.
The width of the allegations made or hinted at in the Defendant’s letter, including as to non-disclosure and (it appears) mis-selling, is to be contrasted with the assertion made in the Defendant’s skeleton that “the defence” to the present claims is lack of capacity/power.
In the Executive Decision of 29 June 2009, the Defendant again hinted at misrepresentation or mis-selling (see paragraph 23 above). The subsequent decisions of the Province Council dated 15 July 2009 and 29 September 2009 are to similar effect (see paragraphs 27 and 29 above).
Non-disclosure by the Claimants is also referred to by Mr Smith and by Mr Vulcano in their statements, and the Defendant’s evidence conspicuously allows room for other defences to be advanced.
I accept the Claimants’ case that it is likely that there will be issues raised by way of defence other than lack of capacity/power. The factual complaint underlying the case on lack of capacity appears to be that the Claimants concealed from the Defendant the “implicit cost” of the Swap Contracts and failed to ensure that it was adequately informed so as to be able to make an informed assessment for itself.
Mr Palagi’s letter refers to the fact that “the Banks did not declare or ever indicate…that the swap was supposed to have a cost”. On the contrary, he complains that the benefit analysis attached to the amortisation plan showed a significant economic benefit. He further complains that the Claimants failed to provide documents with the consequence that the “customer is not made aware of the implications, costs and conflicts of interest deriving from the purchase of a financial product”. He also complains of the Claimants failure to comply with their “duties of diligence, propriety and transparency in the customers’ interest and for market integrity, obligation to acquire all necessary information from customers and to operate in a manner so that they are always adequately informed.”
The Defendant says that this was an early document written without the benefit of input from English lawyers. However, similar points are made in the evidence of Mr Vulcano, their Italian lawyer. At paragraph 43.7 of his second witness statement he states:
“The Commission mentioned at paragraph 83 of Mr Danusso’s witness statement did not have the instruments to evaluate the existence and the amount of the “implicit costs” of the swap contracts, while the Banks would have known those costs very well and failed to disclose them to the Defendant….. It is the existence of those implicit costs, unknown to the Defendant at the time of the resolutions to enter into Swap Contracts, that completely reset and eliminated the “economic convenience” of the operation….”
The Defendant also says, on instructions, that, as presently advised, it has no intention to advance a defence beyond one of lack of capacity/power, but that no undertaking can be given that no further defences will be advanced. It may be, for example, that matters may emerge on disclosure which support further defences. However, as the Claimants point out, this has not been stated in evidence, nor has Mr Palagi sought to withdraw or qualify any of the assertions made in his letter.
On the basis of the material before the court, looking at the case overall I am satisfied that it is likely that there will be issues raised by way of defence involving misrepresentation/non-disclosure and failure to advise/mis-selling. The factual basis of the lack of capacity/power case makes it likely that this will be so, as do the various documents and statements made to date on the Defendant’s behalf.
I also consider that the trial is likely to entail an investigation of matters such as (1) which matters were disclosed to or discussed with the Defendant by the Claimants; (2) what analysis was carried out by the Defendant (including by the Technical Commission) in relation to the Swap Contracts and what conclusions were drawn by the Defendant about the economic terms of those contracts; and (3) whether the Defendant would, as it has asserted, have acted differently if further information had been provided by the Claimants. In considering these matters it will not be possible to isolate the ultra vires issue from the other likely defences.
In all the circumstances, I consider that the proceedings are not likely to be “principally concerned” with the validity of the decisions of the Defendant. That will be an important issue, although not in itself decisive issue because of the further issues of capacity/power/legality. Given in particular that the invalidity issue is not likely to be the only ground upon which the enforceability of the Swap Contracts is challenged, I accept that, as in the JP Morgan v BVG case, as a matter of “overall classification” these proceedings are “principally concerned” with the validity of the Swap Contracts and whether the Claimants can enforce their rights under them.
Nor do I consider that this is a case which in the making of an “overall judgment” it is clear that granting jurisdiction to the courts of Italy will result in the sound administration of justice. In particular, this is not a case in which the proceedings are so closely connected with matters of internal decision making by the Defendant entity that they should not be tried anywhere but in the courts of Italy. There will be no inquiry in the present case into the internal decision making procedures of the Defendant. The real battleground on the violation of law issue will be whether the laws apply to derivatives at all and, if so, whether there was a violation and, if so, whether the Swap Contracts are or are not enforceable.
The Defendant submits that granting jurisdiction to the courts of Italy will result in the sound administration of justice because that is the best way of ensuring no possibility of conflicting decisions. They say that one of the striking features of the dispute is the existence of and continuation of the Italian Administrative Proceedings. These proceedings involve “an administrative matter” not falling within Art. 1 of the Judgments Regulation. They submit that this has the following consequences relevant for the interests of sound administration:
The Italian Administrative Proceedings will continue whatever the outcome of the Defendant’s jurisdiction challenge here and will decide the key issues which would be litigated in the English proceedings. There is, therefore, an obvious risk of inconsistent judgments if both sets of proceedings were to proceed.
Two sets of closely overlapping proceedings in different jurisdictions would be duplicative and wasteful of cost and the parties’ and the courts’ time.
Italy is the best place in which the overlapping issues should be decided – they turn on the decision-making and powers of an Italian public body and on substantive limitations imposed by Italian legislation.
The dismissal of the English proceedings will, in fact, enable the key issues to be dealt with in the one jurisdiction which is clearly best-placed to resolve those issues (i.e. Italy).
That is the best way the English court can secure the important aim of the Judgments Regulation of preventing the risk of inconsistent judgments.
I do not accept that declining jurisdiction will avoid the risk of inconsistent judgments. Regardless of whether the Swap Contracts claims are brought in England or before the civil court in Italy, the Italian Administrative Proceedings will continue. The evidence establishes that under Italian law, at the material time for these proceedings, there is generally a “two track” approach. The Administrative Court jurisdiction only covers resolutions leading to the making of a contract but does not extend to its validity and its performance, which are issues under the exclusive jurisdiction of the Civil Court. As Mr Vulcano acknowledged in his second statement:
“By decision 9/2008 of the Italian Supreme Administrative Court (Consiglio di Stato Adunanza Plenaria),…the jurisdiction of each court, with regards to the contractual activities of Public Administrations, was clarified. It was held that issues relating to the lawfulness of decisions prior to a Public Administration entering into a contract were the exclusive jurisdiction of the Administrative Court and issues concerning the contract thereafter were the exclusive jurisdiction of the Civil Courts. This ‘two track’ system required an administrative body whose decision to enter into a contract had been unlawful and, as a result, annulled by the Administrative Court then to appear before the Civil Court to have the contract annulled.”
Mr Danusso’s evidence was to the following effect:
“The Civil Court is not obliged to declare a contract ineffective as a consequence of the annulment of the decision to enter into such contract. This would also be the case in the event that the annulment of the decision to enter into the contract is upheld by the Administrative Court. Indeed, on the contrary (as further discussed below), a Civil Court is entitled to disregard an administrative act, including this Executive Decision, if it believes that such administrative act is unlawful and indirectly violates the contractual rights of the counterparty.
There is clear case law in Italy which states that civil proceedings concerning rights arising under a contract must not be suspended if at the same time there are administrative proceedings pending in relation to an administrative act which is antecedent to the contract itself. The reason for this is that the administrative proceedings simply concern the public’s legitimate interest (interessi legitimi) that the public administration performs correctly its public functions, while the civil proceedings deal with the individual rights of the contractual counterparty (see Supreme Court Decision no. 3252/2003).
The consequences of this principle is that a civil court is allowed to disregard in its proceedings an administrative act if it believes that such act is unlawful. While the administrative court can annul an administrative act with an erga omnes effect via judgment, the civil court may disregard the same administrative act for the purpose of protecting the rights of the counterparty in that specific case (see Supreme Court Decisions nos. 3252/2003 and 6801/2002).”
This was disputed by Mr Vulcano, who considered that the Civil Court would take the Administrative Court’s decision as its “starting point” and would, in his experience, stay its proceedings pending that decision. Even if that be so, it seems clear on the evidence that even if this court declines jurisdiction in favour of the Italian courts, there will be two sets of proceedings there and a risk of irreconcilable judgments between them.
For all these reasons, I do not consider that the sound administration of justice demands, necessitates or requires trial in the courts of Italy.
The second issue: applicability of Article 22(2) to a public law body
JP Morgan accepted in the JP Morgan v BVG case that Article 22(2) applies to to decisions of public bodies (see the judgment of Aikens LJ at [15]). No such concession is made by the Claimants in this case.
The question whether Article 22(2) has any application to decisions of public bodies has been referred to the ECJ by the Berlin Kammergericht in the JPMorgan v BVG litigation: see the judgment of Aikens LJ at [14].
In those circumstances I consider that I should not decide the issue unless it is necessary to do so, which it is not in the light of my conclusion on the fifth issue.
Conclusion
For the reasons set out above I conclude that the Defendant has not established that the courts of Italy have exclusive jurisdiction pursuant to Article 22(2) and its applications are accordingly dismissed.