BANCA INTESA SANPAOLO SPA & Anor v COMUNE DI VENEZIA

An issue has arisen at the start of a 5-week trial from which it is apparent that the parties hold fundamentally different views as to which matters form part of the trial (to be determined at this hearing), and which matters have been held over for subsequent determination as necessary.

The case is one of a number of disputes arising from the participation of Italian local and regional authorities in swap transactions. In this case, the Defendant (“Venice”) has identified a number of reasons why it says it is not bound by two swap transactions (“the Swaps”) with the Claimants (“the Banks”), including that it did not have capacity to enter into the Swaps, the persons who purported to commit Venice to the Swaps did not have authority to do so; and that various provisions of Italian law were breached by the Banks which had the effect that the Swaps are void or which give Venice a claim in damages.

In order to understand the present dispute, it is only necessary to consider certain of the parties’ claims.

The Banks alleged that if the Swaps were void and/or of no effect, Venice was in breach of various terms of the ISDA Master Agreement, giving rise to an Event or Default under that Agreement, and/or is liable to it in damages under s.2(1) Misrepresentation Act 1967 and/or in tort in English and/or Italian law and/or that Venice is obliged to indemnify them under a Mandate Agreement in respect of any loss the Banks suffer. Breaking those claims down:

The claims under the ISDA Master Agreement proceed on the basis that if the court finds Venice did not have authority or capacity to enter into the Swaps, the Banks will then be entitled to serve Notice of Early Termination under the Swaps and recover certain sums as (in effect) a debt claim.

The other contractual claims seek damages on the basis that Venice is obliged to place the Banks in the position they would have been had the Swaps been valid and binding.

The tortious claims plead that the Banks entered into the Swaps in reliance on various representations made by Venice, that the Banks would not have entered into the Swaps but for the misrepresentation, or but for a breach of duty on Venice’s part to provide the Banks with certain information. On that basis, various heads of reliance expenditure are claimed as damages.

The indemnity claim seeks an indemnity against all losses and liabilities incurred by the Banks in connection with the Swaps.

For its part:

Venice alleges that it is entitled to restitution of the net payments made by it under the Swaps.

Venice also alleges that it was entitled to recover damages under Italian law because the Banks had breached various Italian Regulatory Laws.

The latter set of claims included an alleged failure by the Banks to disclose a mark-to-market of the proposed Swaps to Venice before the Swaps were entered into. The nature of the Venice’s causation case so far as the damages claims are concerned is not clearly pleaded, para.70 of the Defence and Counterclaim alleging:

The case came before me for a CMC on 18 March 2021. In advance of that hearing, the Banks had filed a Case Management Information Sheet (“CMIS”), paragraph 14(a) of which provided:

Paragraph 22 of the CMIS provided:

The Banks’ skeleton for that hearing provided:

Cs’ Quantum Issues arise for determination only if: (i) Venice succeeds in establishing that the Transactions are void; but (ii) the Claimants succeed in establishing one or more of their alternative claims for damages and/or an indemnity to be pleaded in the APOC.

If Cs’ Quantum Issues are to be determined at the main trial (assuming it were possible to do so, which realistically it is not – see below), significant factual and expert financial evidence would be required as to the hypothetical termination valuations of the Transactions, and as to the payments required and other costs to be incurred by the Claimants in terminating the back-to-back hedging swaps entered into by them with third party banks. Such evidence would obviously increase the costs and the time required for trial.

Importantly, any valuation of the Transactions and the hedging swaps can only be undertaken by reference to a particular valuation date, which ought to be the future date on which the Court determines the Transactions are void. Plainly, that date (if is to come at all) cannot be identified in advance, such that the necessary calculations cannot be performed until the liability issues have been determined.”

Venice’s skeleton provided:

I have not seen a transcript of the hearing. However, it will be apparent that the Banks’ proposal was essentially aimed at a valuation or pricing exercise, the need for which would only arise if the Banks’ claims for damages had succeeded and the precise date for which would depend on the judgment following the Main Trial, and that Venice understood might involve a separate expert.

There appear to have been further discussions between the parties which resulted in an agreed order being provided to the court on 26 March 2021. Paragraph 29 of that order provided:

Paragraphs 38 and 53 of the attached Agreed Common Ground and List of Issues provided:

Pausing there, the exclusion effected by paragraph 29 of the order of 18 March 2021 would, as a matter of conventional interpretation, have been understood as limited to matters in the nature of computation and valuation, rather than embracing issues of causation and reliance to the extent that they arose. That was certainly true of issue 53 (interest), and is also true of issue 38, which pre-supposes a finding that Venice “is liable to compensate the Claimants on of the other bases addressed in Issues [32-36] above”. In those claims which required “but for” causation of some kind, there could be no finding that Venice was “liable to compensate the Claimants” absent a finding on the issue of causation and reliance.

The conclusion I have reached on the basis of the wording of the Order is reinforced by the terms of the parties’ skeletons, and the Banks’ CMIS in which the issue was first raised.

A further CMC was due to be heard before Cockerill J on 14 July 2021. In the event, the further directions were agreed, and an agreed order provided to the court for approval. Paragraph 5 of the Order of 14 July 2021 provided:

Issues 50(2) and (3) of the attached Agreed List of Issues and Common Ground provided:

I am told that there are no exchanges between the parties which shed any light on what they were hoping to achieve through this order, and, as the hearing was vacated on the basis of a consent order, there are no skeleton arguments to assist. However, the parties have very different understandings now, the Banks contending that the 14 July 2021 Order did not have the effect of removing issues of causation (including counterfactual questions of what Venice would have done in certain situations) from the Main Trial, and Venice contending it did. Venice has acted consistently with its own understanding, having served no factual evidence to address these issues at this trial. The Banks, consistent with their understanding, have addressed the counterfactual issues which arise on their case (viz what would the Banks had done if the representations as to capacity and authority had not been made).

The parties’ dispute would appear also to extend to the issue of whether any damages recoverable by Venice would fall to be reduced for contributory negligence (which the Banks have alleged).

On 8 June 2022, apparently having forgotten about the order of 14 July 2021, the Banks’ solicitors wrote to Venice’s solicitors referring to paragraph 29 of the Order of 18 March 2021 as it stood prior to the amendment made on 14 July 2021, and stating:

That letter referred, once again, to “quantum issues”, and placed particular emphasis on accounting and valuation issues (“sums paid” and “fair value”). Venice’s solicitors replied on 9 June 2022 stating:

The letter therefore expressly equated the position of the quantification of Venice’s restitution and damages claims with that which had been adopted in relation to the Banks restitution and damages claims.

I have no doubt that, on its objective construction, paragraph 5 of the 14 July 2021 order did not remove issues of causation, including counterfactual questions of causation, from the scope of the Main Trial.

First, the language of paragraph 29, as amended, does not support that construction. The exclusion of issues of causation and “but for” conduct would not fairly fall within the words “the quantification of any restitution or damages”. Further, the wording of paragraph 29(b) assumes that an entitlement to damages will have been established in the Main Trial (“to which Venice is entitled under Issue 50(2) and (3)”). If the court had found that the Banks had unlawfully failed to provide particular information to Venice, but had made no finding that the provision of such information to Venice would have caused it to act any differently, there would not have been any finding of an entitlement to damages on Venice’s part.

Second, for the reasons I have explained, I am satisfied that the terms of paragraph 29 as it stood prior to 14 July 2021 (and in particular those which became paragraph 29(a)) did not have the effect of excluding that part of the Banks’ damages case which involved causation or counterfactual issues from the Main Trial. It would, in those circumstances, have been very surprising if paragraph 29(b), using very similar wording, was intended to operate differently.

Third, the order which Venice claims was made would have involved a very unusual and counterintuitive approach to case management. It would have meant witnesses from Venice addressing the decision to enter into the Swaps being heard at the Main Trial, where the court might be asked to make findings on their conduct and reliability, with the prospect of the same witnesses being asked to come back for a second hearing to address whether they would have acted differently in their decision to enter into the Swaps if certain information had been provided to them and, if so, in what respects. It would also have been very surprising, in a case in which one issue to be determined at the Main Trial was the suitability of the Swaps from Venice’s perspective, if the issue of what alternative (and, ex hypothesi, suitable) transaction Venice would have entered into did not form part of the Main Trial.

The position is, if anything, even clearer with regard to contributory negligence: it cannot sensibly have been thought that the court would make findings about the process by which Venice came to enter into the Swaps in the Main Trial but leave issues of whether it had acted in a contributorily negligent manner in doing so to a subsequent trial.

In response Mr Paul, who argued this issue for Venice and did so with considerable skill, suggested that, properly analysed, Issue 50(2) and (3) in the Agreed Common Ground and List of Issues attached to the Order of 14 July 2021 must have been understood as including issues of causation or counterfactual enquiry, because those issues do not appear anywhere else. I suspect that the difficulty of determining where those issues are dealt with in the Agreed Common Ground and List of Issues arises because of the absence of any sufficiently clear pleading of them, in circumstances in which the Agreed Common Ground and Lists of Issues is (and is meant to be) a document driven by the parties’ statements of case. In any event, I do not think this argument helps Venice, because paragraph 29 was not purporting to exclude all issues raised by Issue 50(2) and (3) from the Main Trial, but only “the quantification of any restitution or damages to which Venice is entitled under Issue 50(2) and (3)”.

For these reasons, I am satisfied that those issues of causation and counterfactual conduct raised by the parties’ pleaded cases are to be resolved at this trial.

I will wait to hear from the parties in relation to any applications which may follow from this determination.