Dexia Crediop SpA v Provincia di Pesaro e Urbino

The Claimant (“Dexia”), an Italian company carrying on banking business, and the Defendant (“Pesaro”), a municipal authority in the Marche region of Italy, entered into two interest rate swap transactions in 2003 and 2005. Each of the transactions was subject to a 1992 International Swap Dealers Association (“ISDA”) Master Agreement, Multicurrency - Cross Border, (“the Master Agreement”) and the Schedule thereto (“the Schedule”) which the parties concluded in 2002.

On 25th June 2021, Pesaro commenced legal proceedings in Italy seeking to unwind or set aside these transactions.

In October 2021, Dexia commenced the current proceedings in England seeking a number of declarations to the effect that the transactions were valid, lawful and binding on the parties.

The proceedings instituted in England by a claim form issued on 13th October 2021 were served on Pesaro. Pesaro acknowledged service of the proceedings but indicated an intention to contest the Court’s jurisdiction. Notwithstanding that intention, no application to contest jurisdiction was made.

Pesaro has taken no active part in the proceedings, with some limited exceptions.

Dexia has applied for summary judgment in respect of a number of its claims for declaratory relief. To that end, Dexia has also made applications for permission to amend its Particulars of Claim and to adduce expert evidence of Italian law in support of its application for summary judgment.

Having been satisfied that the proceedings and the relevant applications were properly served upon Pesaro, during the course of the hearing on 8th September 2022, where Dexia was represented by Mr Jasbir Dhillon KC and Mr Geoffrey Kuehne and Pesaro did not appear, I granted permission to Dexia to amend the Particulars of Claim and to adduce expert evidence. I set out my reasons for granting permission for these applications in this judgment.

The major part of this judgment is concerned with Dexia’s application for summary judgment.

On 5th March 2002, the Provincial Council of Pesaro (“the Provincial Council”) approved new Accounting Rules, Article 93 of which permitted Pesaro’s use of derivative financial instruments such as interest rate swaps and options “to hedge interest rate risks and manage liabilities arising from bond issues, loans and other forms of recourse to the financial markets permitted under the law”, provided such use was not for speculative purposes.

On 26th June 2002, by Resolution No. 2164/2002, Pesaro acting by the Division Manager of its Financial Planning and Information Systems Division, Mr Marco Domenicucci (“the FPIS Division Manager”), appointed Dexia to provide assistance with respect to possibilities for derivative transactions for interest rate swaps.

On 11th July 2002, Dexia confirmed by letter that it accepted the appointment for the provision for the “definition of strategies for the transformation of existing indebtedness and for the assistance, advice and management of related transactions (interest rate swaps and options)”.

On 12th July 2002, pursuant to Resolution No. 201/2002, the Executive Board of Pesaro (“the Board”) resolved to approve Pesaro entering into the Master Agreement and Schedule with Dexia and entering into a fixed rate swap transaction under the Master Agreement in the nominal amount of €30,962,807.18 (“the 2002 Swap”).

On 16th July 2002, Pesaro and Dexia entered into the Master Agreement and Schedule.

The Master Agreement opens by recording that the parties “have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this 2002 Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions”.

The material terms of the Master Agreement are as follows:

“1.

Interpretation

…

(b)

Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement, such Confirmation will prevail for the purpose of the relevant Transaction….

(c)

Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions …

3.

Representations

Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement) that:-

(a)

Basic Representations

(i)

Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing;

(ii)

Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance;

(iii)

No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;

(iv)

Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and

(v)

Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors’ rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)) …

(d)

Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect …

9.

Miscellaneous

(a)

Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto …

13.

Governing Law and Jurisdiction

(a)

Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule.

(b)

Jurisdiction. With respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement (“Proceedings”), each party irrevocably:-

(i)

submits to the jurisdiction of the English courts if this Agreement is expressed to be governed by English law or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and

(ii)

waives which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such a party …”

The material terms of the Schedule to the Master Agreement included Part 4, clause (h) which provided that “Governing Law. This Agreement will be governed by and construed in accordance with the laws of England”.

The Schedule provided at Part 5, clause (4) that:

“Relationship between Parties. Each party will be deemed to represent to the other party on the date on which it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction):

(a)

Evaluation and Understanding. It is capable of assessing the merits of and evaluating and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the financial and other risks of that Transaction.

(b)

Status of the Parties.The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction.”

In addition, the Schedule provided at Part 5, clause 5(ii) that Section 3(a)(ii) of the Master Agreement would be amended as follows:

“Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action and made all necessary determinations and findings to authorize such execution, delivery and performance.”

In addition, the Schedule amended the Master Agreement by including the following representation at Section 3(g):

“Non-speculation. This agreement has been, and each Transaction hereunder will be (and, if applicable, has been), entered into for purposes of managing its borrowings or investments and not for the purposes of speculation”

The Schedule also inserted a further representation at Section 3(i) of the Master Agreement which included a “no-reliance” clause by stating that:

“No reliance. Each party represents to the other (which representation will be deemed to be repeated by each party on each date on which a Transaction is entered into or amended, extended or otherwise modified) that it is acting for its own account, and has made its own independent decisions to enter into this Agreement and any Transaction hereunder and as to whether this Agreement and any Transaction hereunder is appropriate or proper for it based on its own judgment and upon advice from such advisors as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Agreement or any Transaction hereunder, it being understood that information and explanations related to the terms and conditions of this Agreement and any Transaction hereunder shall not be considered investment advice or a recommendation to enter into this Agreement or any Transaction hereunder. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of any Transaction hereunder”

I set out below a summary of the transactions made under the Master Agreement and Schedule. A number of the relevant documents were created and written in the Italian language, but I have relied principally on English translations made of these documents.

On 3rd September 2003, Dexia sent Pesaro a presentation (“the First Presentation”) outlining potential derivative transactions by which Pesaro could seek to hedge its interest rate risk arising from its existing debt.

On 12th September 2003, by Resolution No. 3390/2003, the FPIS Division Manager approved the making to Dexia of an irrevocable proposal for an interest rate swap the terms of which corresponded to those indicated in the First Presentation, with a total outstanding (nominal) amount of approximately €19,990,951.72. The Effective Date of the transaction was 30th June 2003 and the Termination Date was 30th June 2013. The irrevocable proposal was said to have been made pursuant to Article 1329 of the Italian Civil Code, that the transaction was to be entered into in accordance with the Master Agreement and Schedule, and included the following terms:

“…

Market risk

It should be noted that in this type of swap, in the period from December 31st, 2003 to June 30th, 2005 if 6-month Euribor recorded 10 Target Business Days prior to the End Date of each Rate Period (6-month Euribor set in arrears) becomes lower than or equal to 2.00%, the Authority shall pay an amount to the bank counterparty, which will be higher as the 6-month Euribor, recorded at 2 Target Business Days prior to the Start Date of each Rate Period (standard 6-month Euribor) will be lower than 1.85% …

Therefore, entering into such a transaction does not completely mitigate the exposure to the interest rate that the Authority has in relation to the underlying bonds which are subject to this swap transaction …

The Authority represents that it entered into this IRS transaction not for speculative purposes, but solely for the purpose of hedging interest rate risk and for the management of its own liabilities resulting from bond issues, bad loans and other forms of recourse to the financial market permitted by law …”

Resolution No. 3390/2003 confirmed amongst other things that:

On 15th September 2003, Dexia wrote to Pesaro confirming its unconditional acceptance of the proposal which resulted in “the First Transaction”. Together with Resolution No. 3390/2003, Dexia’s letter constituted the Confirmation of the First Transaction, which had an Effective Date of 30th June 2003 and a Termination Date of 30th June 2013.

On 2nd August 2004, by Resolution No. 2906/2004, Pesaro, acting by the FPIS Division Manager, exercised its option to terminate the 2002 Swap, which as of 30th July 2004, had a positive mark-to-market value of €110,000.

Between October and December 2005, at Pesaro’s request, Dexia presented Pesaro with possible solutions for the restructuring of the First Transaction, on the basis of the same underlying debt positions.

On 20th December 2005, by Resolution No. 4733/2005, the FPIS Division Manager approved, among other things, the discharge of the First Transaction and Pesaro’s entry into a second transaction (“the Second Transaction”), being a replacement interest rate swap transaction involving a variable rate and a variable rate with a collar, in respect of the same underlying debt position.

On 20th December 2005, pursuant to the authorisation granted by Resolution No. 4733/2005, Pesaro wrote to Dexia making the authorised irrevocable proposal for the termination of the First Transaction and the parties’ entry into the Second Transaction, which was an interest rate swap the terms of which corresponded to those indicated in the First Transaction, with a total outstanding (nominal) amount of approximately €19,201,081.68. The transaction had an Effective Date of 30th June 2005 and a Termination Date of 31st December 2025. The irrevocable proposal was said to be made pursuant to Article 1329 of the Italian Civil Code and expressly stated that the transaction was to be made under the Master Agreement and Schedule.

Pesaro’s letter confirmed, inter alia, that:

Resolution No. 4733/2005:

On 22nd December 2005, Dexia confirmed its unconditional acceptance of the proposal for the termination of the First Transaction and its replacement with the Second Transaction.

I shall refer to the First Transaction and the Second Transaction, together with the Master Agreement and the Schedule, as “the Transaction Documents”.

On 25th June 2021, Pesaro commenced the Italian Claim in the Court of Pesaro, First Civil Division, by serving its writ of summons on Dexia.

By the Italian Claim, Pesaro alleges that:

By the Italian Claim, Pesaro claims damages for loss allegedly consisting of the moneys paid by Pesaro to Dexia to date pursuant to both Transactions, and a sum representing the current negative “mark-to-market” valuation of the Second Transactions, and a declaration that any sums due to Dexia under both Transactions are unenforceable and ineffective against Pesaro; alternatively, restitution of the sums paid by Pesaro to Dexia pursuant to the Second Transaction only, and a declaration that no further sums are or will be due to Dexia under the Second Transaction.

On 13th October 2021, Dexia issued its Claim Form, which was served on Pesaro by email, as certified by an email dated 30th November 2021 sent by Avv. Giuseppe Massimiliano Danusso, Dexia’s Italian lawyer (paragraph 12 of the first witness statement of Mr Michael Hawthorne dated 13th May 2022).

On 20th December 2021, Pesaro acknowledged service of the Claim Form by its solicitors, Spencer West LLP (who were subsequently permitted to come off the record as solicitors for Pesaro by an order of Moulder, J on 8th March 2022). In the acknowledgment of service, Pesaro indicated its intention to contest the jurisdiction of the Court.

However, Pesaro made no application to challenge the Court’s jurisdiction in accordance with CPR Part 11. Accordingly, by CPR rule 11(5), Pesaro is to be treated as having accepted that the Court has jurisdiction to try Dexia’s claim. In these circumstances, Pesaro’s acknowledgment remains effective (unlike for example where a defendant issues an application to challenge the Court’s jurisdiction but fails in the challenge: CPR rule 11(7)).

On 23rd February 2022, Pesaro wrote to Dexia’s Italian lawyers (Bonelli) and then English solicitors (Pinsent Masons) providing details of a postal and email address “to which notices shall be sent as per the “Instructions for the defendant”, attached to the Claim Form filed on 13 October 2021 in the interest of Dexia Crediop Spa …”. The email address provided was “provincia.pesarourbino@legalmail.com”.

However, on 15th March 2022, Maria Beatrice Riminucci of Pesaro informed Avv. Giuseppe Massimiliano Danusso, Dexia’s lawyer, that all future communications should be sent to a different email address: “provincia.pesarourbino@legalmail.it”. The difference was the change from “.com” to “.it”.

Later, by letter on 18th May 2022, Pesaro informed Dexia that it took objection to the English Court’s jurisdiction and the validity of service of the Claim Form on Pesaro. I do not decide whether there is substance in Pesaro’s comments on the validity of service. However, in circumstances where I am satisfied that Pesaro received the Claim Form and understood its contents, acknowledged service of the Claim Form, and did not object to the Court’s jurisdiction in accordance with CPR Part 11, I am also satisfied that the Court has jurisdiction in respect of this action.

On 24th March 2022, Dexia served its Particulars of Claim upon Pesaro by email, being a valid form of service of formal proceedings in Italy (paragraphs 12-14 of the first witness statement of Mr Michael Hawthorne dated 13th May 2022).

Any Defence by Pesaro had to be served by 21st April 2022 (being 28 days after the service of the Particulars of Claim), but Pesaro did not serve a Defence and did not ask for an extension of time in which to file a Defence (paragraph 14 of the first witness statement of Mr Michael Hawthorne dated 13th May 2022).

On 13th May 2022, Dexia issued its first application notice seeking permission to amend the Claim Form and applying for summary judgment in respect of some of its claims for declaratory relief (declarations no. 1, 3-6, 8-16). This application was served by email on Pesaro on 16th May 2022.

On 13th May 2022, Dexia requested the Court by email to direct that an expedited hearing of its application take place. This email was copied to Pesaro.

On 18th May 2022, Pesaro sent a letter to Dexia and also to the Court stating that it had “received yours and took note that Dexia intends to accelerate the English trial to obtain a sentence from the English judge in order to try to verify the case Italian”. This appears to be a reference to Dexia’s first application notice (for permission to amend the Claim Form and for summary judgment), although it refers to service having taken place on 17th May 2022. In any event, it is clear to me that Pesaro had received Dexia’s first application notice.

On 23rd May 2022, Cockerill, J directed that a hearing of the application be listed in September 2022 and the Court indicated that it could accommodate a hearing on 1st, 2nd or 8th September 2022. Later that day, Pesaro informed the Court that “In agreement with Dexia’s lawyers, we would like to inform you of our preference for the date of 8 September”.

On 27th July 2022, Dexia issued its second application notice seeking permission to rely on the expert report of Italian law prepared by Professor Aurelio Gentili dated 27th July 2022 and, in addition, seeking summary judgment in respect of an additional claim for declaratory relief (declaration no. 7).

The second application notice was served by email upon Pesaro on 28th July 2022. There was no response by Pesaro to the service of this application. However, as the email was sent to the same recipient at “provincia.pesarourbino@legalmail.it”, there is no reason to think that the application was not received by Pesaro.

I am therefore satisfied that Pesaro received the first and second application notices issued by Dexia. In addition, the appointment for the hearing of the application for summary judgment was fixed having regard to Pesaro’s own preference. Nevertheless, at the hearing of Dexia’s applications on 8th September 2022, Pesaro did not appear and was not represented. Further, although Pesaro had been represented by English solicitors, it has chosen not to instruct other solicitors. Pesaro has not indicated that it required further time in which to appear at the hearing of the applications. I must conclude therefore that Pesaro has voluntarily and knowingly waived its right to appear.

In these circumstances, I consider that it is appropriate to continue to proceed with the hearing in the absence of Pesaro and I consider that there is a public interest in doing so (R v Hayward, Jones and Purvis [2001] EWCA Crim 168; [2001] 2 Cr App R 11, para. 22.5; HC Trading Malta Limited v Savannah Cement Ltd [2020] EWHC 2144 (Comm), para. 4). I am conscious that Pesaro has not articulated a complete response to Dexia’s applications, but it has given some indication of its position in its letter dated 18th May 2022 and in the allegations and case it has advanced before the Italian Court. Notwithstanding, whether or not Pesaro has set out its position in response to the applications fully, I do not consider that this is a reason not to proceed with the hearing given the fact that Pesaro has, in my judgment, knowingly chosen not to appear or be represented at the hearing, which was fixed having regard to Pesaro’s own stated preference.

Dexia has applied for permission to amend the Claim Form so that the declarations therein set out reflect the precise terms of the declarations claimed in the Particulars of Claim. The proposed amendments are said to be closely related to the declaratory relief originally sought; there are also additional declarations sought as to the absence of an Event of Default, an entitlement to an indemnity in respect of any claim brought against Dexia in breach of other declarations sought, and as to such claims being time-barred. These latter declarations do not arise for consideration upon the applications for summary judgment considered below.

The declarations claimed in the Particulars of Claim are known to Pesaro by reason of the fact that the Particulars of Claim have been served on Pesaro.

I was concerned momentarily that the declaratory relief claimed in the Particulars of Claim may have gone outside the scope of the relief claimed in the Claim Form. However, I do not see that of itself to be an objection to allowing Dexia permission to amend. In any event, the Claim Form as originally served in its unamended form claimed additional relief as follows “Further or other relief (including further or other declaratory relief)”.

I can see no reason why the application for permission to amend should not be permitted, given that Pesaro is fairly on notice of the proposed amendments, the proposed amendments reflect the claims for declaratory relief already pleaded in the Particulars of Claim and there is no identifiable prejudice to Pesaro if the application were allowed. I therefore allow Dexia to amend the Claim Form in the manner set out in the draft amendments attached to the first application notice.

Dexia applies for summary judgment in its favour in respect of its claim for a number of declarations. Although Dexia’s application notices originally sought permission to make the summary judgment application, as Pesaro has filed an acknowledgment of service, no such permission is required (CPR rule 24.4(1)).

In considering applications for summary judgment, the Court has regard to the following principles as have been set out and explained on numerous cases (notably in Easyair Ltd (trading as Openair) v Opal Telecom Ltd [2009] EWHC 339 (Ch), para. 15). Recently, in Abaidildinov v Amin [2020] EWHC 2192 (Ch); [2020] 1 WLR 5120, at para. 25, Robin Vos, J succinctly outlined the relevant principles as follows:

The application for summary judgment is made in respect of Dexia’s claim for declaratory relief. There has traditionally been some reluctance to grant declaratory relief in applications for default judgment on the basis that declaratory relief should be granted only after argument between the parties or in the clearest of cases; the key consideration is whether declaratory relief can be granted without injustice to the defendant (Equitas Ltd v Wave City Shipping Co Ltd [2005] EWHC 923 (Comm), para. 17; Goldcrest Distribution Ltd v McCole [2016] EWHC 1571 (Ch), para. 43).

Of course, the present application is not for a default judgment, but summary judgment, which involves the Court considering the merits, rather than merely granting relief by reason of the defendant not having acknowledged service of a claim form or not having filed a defence. I do not see that any especial consideration applies for the purposes of disposing of a summary judgment application where the claimant’s claim is not for an order for the payment of money, but for a declaration. Of course, declarations by nature are discretionary remedies, but the Court also has a discretion when deciding whether to grant summary judgment even if the requirements of CPR rule 24.2 are satisfied.

Having regard to Pesaro’s letter dated 18th May 2022 and its case advanced before the Italian Court, the following issues arise for consideration by the Court in connection with Dexia’s application for summary judgment:

The governing law of the Transactions

Dexia’s case is that the transactions are governed by English law by reason of express choice of law provisions in the Master Agreement and Schedule.

In the Italian proceedings commenced by Pesaro, it is asserted that

“… the parties undoubtedly indicated that they considered the negotiations on the 2005 Swap to be subject to Italian law.

The willingness to subject the 2005 Swap to Italian law (which is expressly permitted by Article 3(2) of the Rome Convention of 198033) can be inferred both from the reference to and compliance with Consob Regulation No. 11522/1998, and from the references to Law No. 448/2001 and Ministerial Decree No. 389/2003, and, finally, from the same correspondence through which the parties entered into the derivative contracts, formulating the relevant agreements with express reference to Article 1329 of the Italian Civil Code and therein agreeing that “in the event of discrepancy and limited to the new transaction, the clauses of the confirmation itself shall prevail over the provisions of the ISDA Framework Agreement”. All the foregoing therefore indicates with reasonable certainty that the parties never intended to disapply Italian law which, indeed, also on the basis of Article 3(2) of the Rome Convention of 1980 in force at the time, is certainly to be regarded as the law applicable to the transaction in question …

The 2005 Swap, therefore, is a transaction which, by the parties’ intention, is subject not to English law but to Italian law, so that the first requirement of clause 13 of the ISDA Master Agreement is not fulfilled and English jurisdiction is therefore (at most) concurrent with, and certainly not exclusive of, Italian jurisdiction …”

The issue of identifying the applicable law is a matter for the EEC Convention on the Law Applicable to Contractual Obligations (“the Rome Convention”) which was incorporated in the law of the United Kingdom by the Contracts (Applicable Law) Act 1990. The 1990 Act applies to contracts concluded between 1st April 1991 (when the 1990 Act came into force) and 17th December 2009 when the Rome I Regulation (EU) entered into force. The Transactions were concluded in 2003 and 2005.

Mr Jasbir Dhillon KC, on behalf of Dexia, submitted that:

The relevant provisions of the Rome Convention are as follows:

“Article 3

Freedom of choice

1.

A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

2.

The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice under this Article or of other provisions of this Convention. Any variation by the parties of the law to be applied made after the conclusion of the contract shall not prejudice its formal validity under Article 9 or adversely affect the rights of third parties.

3.

The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law at the country which cannot be derogated from by contract, hereinafter called ‘mandatory rules’.

4.

The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 8, 9 and 11 …

Article 8

Material validity

1.

The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Convention if the contract or term were valid …

In my judgment, the Transaction Documents are plainly governed by English law for the following reasons.

First, the Master Agreement and the Schedule expressly and without any qualification provide that the Agreement (which by Section 1(c) of the Master Agreement comprises all of the Transaction Documents) is to be governed by and construed in accordance with English law.

Second, the only factors which I understand that Pesaro relies on as counteracting that express choice of English law are the references to certain provisions of Italian law in the Pesaro proposals, which were accepted by Dexia, or elsewhere, namely:

I do not consider any of these references are sufficient to displace the express choice of English law, because the first two provisions are not concerned with the terms and performance of the Transaction Documents themselves, but with the circumstances leading up to the conclusion of the relevant contractual arrangements, and because the latter two provisions are not located in the Transaction Documents at all.

Further, even if these references could be said to be concerned with the terms and performance of the Transaction Documents, they are not sufficient either to demonstrate with reasonable certainty that Italian law was being chosen as the governing law and they are not sufficient to lead to the conclusion that the parties had overridden their stated choice of English law either expressly or in any other way demonstrable with reasonable certainty.

In addition, if the parties’ intention had been to choose Italian law in the Second (or First) Transaction as the new governing law to replace the choice of English law in the Master Agreement and Schedule, in accordance with Article 3(2) of the Rome Convention, the parties would have used language which was far more explicit to that end, for example by stating that the choice of law in the Master Agreement and Schedule is replaced by the choice of Italian law recorded in the Second Transaction. However, there is no such provision nor indeed a provision which comes arguably close to such a provision.

Indeed, the Master Agreement contemplates - and the First and Second Transactions both provide - that the First and Second Transactions are entered into under and/or in accordance with the terms of the Master Agreement and Schedule. This, in my judgment, puts paid to any suggestion of the First and Second Transactions being subject to a governing law other than English law.

Mr Dhillon KC postulated an argument which might have been advanced by Pesaro had it appeared at the hearing of the summary judgment application, namely that notwithstanding the express choice of English law as the governing law, which is effective in accordance with Article 3(1) of the Rome Convention, any mandatory provision of Italian law might still be applicable pursuant to Article 3(3).

Article 3(3) provides that “The fact that the parties have chosen a foreign law … shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law at the country which cannot be derogated from by contract, hereinafter called ‘mandatory rules’”.

Mr Dhillon KC met this possible argument as follows:

In putting forward these submissions, Mr Dhillon KC relied on the decision of the Court of Appeal in Dexia Crediop SpA v Comune di Prato [2017] EWCA Civ 428; [2017] 1 CLC 969. In that case, the Court of Appeal considered the application of Article 3(3), which was similarly concerned with a swap transaction made pursuant to the ISDA 2002 Master Agreement. The Court of Appeal referred to its earlier decision in Banco Santander Totta SA v Companhia de Carris de Ferro de Lisboa SA [2016] EWCA Civ 1267; [2017] 1 WLR 1323. The Court said at para. 126-137:

“126.

The Banco Santander case went to the Court of Appeal [2016] 2 CLC 980; [2017] 1 WLR 1323 in which Mr Ali Malek QC (for the investors in that case) submitted that Blair J was wrong to hold that elements relevant to the situation could include factors of an international kind which did not point to another country. That argument was rejected. Etherton MR (with whom Sir Martin Moore-Bick and Longmore LJ agreed) said:

‘46. I accept the judge’s analysis, and Santander’s case, that article 3(3) is properly to be approached as a limited exception to the policy or principle or starting point of party autonomy and, as such, it is to be construed narrowly.

…

Therefore, given the nature of the Transaction Documents being based on the ISDA Master Agreement, there is no scope for allowing any mandatory rules of Italian law - should there be such laws - to displace, under Article 3(3), the express choice of English law made by the parties in the Master Agreement and Schedule, under and in accordance with which the First and Second Transactions were concluded.

I should add that the second international element relied on by Dexia was the fact that Dexia had hedged its exposure under the Transactions by entering into back-to-back swaps with market participants outside of Italy. I did not have those swap transactions before me and therefore I am unable to rely on that as importing a sufficient international element so as to avoid the application of Italian mandatory laws. Nevertheless, the first international element referred to above is sufficient to achieve the same end.

In my judgment, the Transaction Documents are governed by English law in accordance with Article 3(1) of the Rome Convention.

Compliance with Italian Law and Declaration 7

Declaration 7 claimed by Dexia is of added complexity because in order to seek summary judgment for that claim it seeks the Court’s permission to rely on expert evidence, namely the report dated 27th July 2022 of Professor Aurelio Gentili, Emeritus Professor of Civil Law at Università Roma Tre.

The grounds of the application are set out in paragraphs 46-51 of the first witness statement dated 27th July 2022 of Mr Giuseppe Massimiliano Danusso, namely that the proceedings are of considerable importance to Dexia, the adduction of such evidence is proportionate, there is no prejudice to Pesaro, given that it has been put on notice of the application to adduce this evidence and it has chosen not to participate in the proceedings, and the Court will benefit from the assistance of this evidence. The application expressly noted that this evidence would be relied on by Dexia in support of its application for summary judgment (paragraph 46 of Mr Danusso’s witness statement).

During the course of the oral hearing, I allowed Dexia permission to adduce this evidence for the reasons relied on by Dexia.

The representation pleaded by Dexia at paragraph 23(2) of the Particulars of Claim relies on Section 3(a)(iii) of the Master Agreement. As pleaded, the representation is that such execution, delivery and performance do not, and did not at any material time, violate or conflict with any law applicable to Pesaro, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets.

At paragraph 24 of its Particulars of claim, Dexia pleads that on its true construction, the representation means, alternatively there is an implied representation, that the execution, delivery and performance of the Transaction Documents did not violate or conflict with any Italian laws or regulations applicable to Pesaro, including to the extent that they are applicable to the Transactions:

At paragraph 41 of the Particulars of Claim, Dexia pleads that it was in fact the case that the execution, delivery and performance of the Transaction Documents did not violate or conflict with any laws or regulations applicable to Pesaro, including those set out above.

Dexia’s application for summary judgment is in respect of its claim for a declaration that the Transactions conformed with each of these provisions of Italian law.

I will address this application relying principally on the expert evidence of Professor Gentili.

Article 119(6) of the Italian Constitution and Article 30(15) of Law no. 289/2002

Article 119(6) of the Italian Constitution stipulates that “Municipalities, provinces, metropolitan cities and regions have their own assets, which are allocated to them pursuant to general principles laid down in State legislation. They may resort to indebtedness only as a means of funding investments. State guarantees on loans contracted by such authorities are not admissible.”

At paragraph 4.23 of his report, Professor Gentili stated that “The Constitutional Court stated that “it should be noted that the last paragraph of Article 119 of the Italian Constitution establishes a limiting financial balance, which takes the form of allowing local authorities to borrow, but only to finance their investment expenditure”.”

In its claim before the Italian Courts, Pesaro has contended that the Transactions represent a form of indebtedness which was not aimed at financing investments, including due to the alleged imposition of certain “implicit” costs which were not fully disclosed by Dexia. Pesaro relies on the decision of the Supreme Court of Italy in Cattolica, which (according to Pesaro’s case) held that derivative transactions such as the Transactions should be regarded as a form of indebtedness for the purpose of Article 119.

Article 30(15) Law no. 289/2002 provides that a contract entered into in breach of Article 119(6) of the Constitution shall (as a matter of Italian law) be considered null and void (Professor’s Gentili’s report, at para. 4.42-4.45).

Mr Dhillon KC on behalf of Dexia submitted that any such argument, if it were advanced before the English Court, would be bound to fail. The decision in Cattolica held that, although derivative contracts in general do not constitute indebtedness, certain types of derivatives may have the effect of creating indebtedness if they: (i) provide for an upfront payment; (ii) extinguish pre-existing underlying loans; or (iii) significantly modify existing loans (see paragraph 4.31 of Professor Gentili’s report; Deutsche Bank AG Ltd v Comune di Busto Arsizio [2021] EWHC 2706 (Comm), para. 325). However, it is apparent from the terms of the Transactions that they did not involve an upfront payment or extinguish pre-exiting underlying loans. It is also plain that the Second Transaction - an interest rate collar - was a hedging transaction, which did not affect Pesaro’s underlying borrowing. The position is identical to that considered in Deutsche v Busto, at para. 342, and, as in that case, the Second Transaction cannot be said to involve any significant modification of Pesaro’s borrowing.

At paragraph 4.33 of his expert’s report, Professor Gentili stated that:

“… even assuming that the Cattolica Decision correctly reflects Italian law, under the law as explained in that decision, only derivative contracts involving an upfront payment and those which terminate or significantly modify pre-existing loans should be considered “indebtedness”, and as such may be relevant for the purpose of Article 119(6) of the Italian Constitution. I note on this point that there is no indication by the Court in the Cattolica Decision as to what the “significant modifications” to existing indebtedness could be or how such modifications are to be identified. In any case, in my view, the entering into of a plain vanilla derivative transaction which simply has the effect of hedging the interest rate risk to which a local authority is exposed on its indebtedness, without modifying the duration or amount of such indebtedness, cannot be regarded as a significant modification in the sense indicated under the Cattolica decision, even despite the lack of clarity from the Court in that judgment as to what might constitute a “significant modification”.”

It follows, argues Dexia, that as there is no violation of Article 119, Article 30(15) is not engaged, and any defence based on this provision has no prospect of success.

I am prepared to accept that Italian law is as explained by Professor Gentili and as accepted by this Court in the earlier decision of Deutsche Bank AG Ltd v Comune di Busto Arsizio [2021] EWHC 2706 (Comm) (as to which Dexia tendered notice under section 4 of the Civil Evidence Act 1972).

There is no evidence before the Court that the Transactions had any of the three factors which would have rendered them as forms of indebtedness as identified by the Supreme Court of Italy in the Cattolica decision. In my judgment, there is no real prospect of the Transactions being treated as void on this ground.

Article 42 of TUEL

Article 42 of TUEL requires certain “fundamental acts” to be approved by the Provincial Council (rather than another body, such the Executive Board, or an officer of the Province) in order to be considered valid. Such fundamental acts include, among other things, “loans” and “expenditures which bind budgets for the following years”.

The Italian Supreme Court in Cattolica held that certain interest rate swaps required authorisation by the City Council under TUEL Article 42(2) if their characteristics are such as to constitute indebtedness, which they will on the three bases identified above, namely: (i) the inclusion of an “upfront” premium/loan, (ii) the extinguishment of existing loans, or (iii) the significant modification of existing loans so as to give rise to new indebtedness (paragraph 4.60 of Professor Gentili’s report; Deutsche Bank AG Ltd v Comune di Busto Arsizio [2021] EWHC 2706 (Comm), para. 325, 331, 335-337).

Mr Dhillon KC submitted that, assuming for the purposes of the summary judgment application, that the decision in Cattolica represents a correct statement of the law,

In my judgment, the submissions advanced by Dexia must be upheld. The Transactions were not of the type which required the approval of the Provincial Council and even if they were, such approval had been obtained by reason of Resolution No. 33/2002 and Resolution No. 33/2003. There is no real prospect of the Transactions being treated as contravening Article 42 of TUEL.

Article 41 of Law No. 448/2001

Article 41 of Law No. 448/2001:

Dexia’s case is that at the time of the Transactions, Article 41 of Law No. 441/2001 did not impose on local authorities any specific requirements regarding the entering into derivative contracts (paragraph 4.70 of Professor Gentili’s report).

In the Italian proceedings, Pesaro contends that the Transactions did not comply with Article 41(2) in that they did not meet the economic convenience requirement (i.e., they were not “economically advantageous”), due to the fact that the Transactions included certain “implicit costs” to Pesaro.

Mr Dhillon KC on behalf of Dexia submitted that Pesaro’s contention is “doubly misconceived” in that:

I accept these submissions. I do not see that Pesaro has any realistic basis for contending that there was non-compliance with Article 41 of Law No. 448/2001. There is no evidence before the Court to the contrary.

MEF Regulation No. 389/2003 and MEF Circular of 27 May 2004

As already explained, Article 41(1) of Law No. 448 of 2001 gave a power to the MEF to coordinate local authorities’ access to capital markets.

Pursuant to that power, Decree 389 set out certain technical rules on the use of derivatives by local authorities. Article 3(2) of Decree 389 set out a list of the types of derivative instruments which local authorities were permitted to enter into in accordance with the MEF Regulation, including:

On 27th May 2004, the MEF issued the 2004 Circular providing guidance as to the interpretation of the MEF Regulation. This guidance (among other things) provided that:

In the Italian proceedings, Pesaro has alleged that the Transactions were entered into in breach of Decree 389, because:

Mr Dhillon KC on behalf of Dexia submitted that each of these contentions is without merit:

However, Mr Dhillon KC referred me to Professor Gentili’s discussion (at para. 4.84 of his report) of a decision of the Court of Appeal of Milan (decision no. 2393 of 2020) which has been followed in three subsequent decisions, namely Court of Appeal of Milan decision no. 4712/2018, Court of Appeal of L’Aquila decision no. 576/2021 and Court of Venice decision no. 696/2022 which suggests that there must be an equivalence of value between the cap and floor elements of a collar swap. Professor Gentili, at paragraphs 4.84-4.92 of his report, considers that this line of authority cannot be taken as a correct statement of Italian law. At paragraph 4.83, Professor Gentili questions the basis of these earlier decisions in light of the Supreme Court’s decision in Cattolica:

“… I should note that Court of Cassation in the Cattolica Decision acknowledged in paragraph 4.6 that swaps in general always have a negative mark to market at inception for one of the parties. The Court further held in paragraph 9.8 that certain elements, such as the mark-to-market, probabilistic scenarios and hidden costs must be disclosed by the bank to its customer in order to comply with mandatory requirements (such as “causa” and “oggetto”) required for the validity of a contract governed by Italian law. As such, the Supreme Court acknowledged that even in a scenario where a local authority is a party to a derivative contract the mark-to-market of the transaction at inception is never equal to zero. This means that if on the one hand as we have seen above local authorities were permitted to enter into “collar” swaps, and on the other hand, if the mark-to-market at inception is never equal to zero, there could never be an equivalence between the value of the floor and cap options. This is because a negative mark-to-market at inception presupposes a financial difference between the value of the floor and cap options in a collar swap.”

I have considered the evidence of Professor Gentili and the submissions made on behalf of Dexia by Mr Dhillon KC in connection for the claim for Declaration 7.

I have reached the conclusion that there is no real prospect of Pesaro successfully contending that the Transactions did not comply with the Italian laws identified above, based on the evidence before the Court.

However, in respect of the arguments relating to article 3(2)(d) of Decree 389 (and the 2004 Circular insofar as it relates to Decree 389), there are a number of aspects in connection with this claim for Declaration 7 which gives me pause in disposing of the same on a summary judgment application. In particular:

Accordingly, insofar as compliance with article 3(2)(d) of Decree 389 is concerned, I am not minded to grant summary judgment. Given the conflict in the opinion of Professor Gentili and a number of decisions of the Italian Court, it seems to me appropriate that this should be left over for trial.

The other issues of Italian law are, in my judgment, summarily determinable on the grounds that there is no real prospect of success on the part of Pesaro in establishing these arguments, based on the evidence before the Court.

Even if I am wrong in this respect, as discussed below, I do not consider that these grounds relate to the capacity of Pesaro, but instead the material validity of the Transactions, and so is a matter for English law. Accordingly, as there are no grounds of invalidity suggested by Pesaro as a matter of English law, the Transactions - in particular, the Second Transaction must be treated as valid.

Validity of the Transactions

The question is whether the Transactions are valid or not. If this were a matter of English law, being the governing law of the Transactions in accordance with Article 3(1) of the Rome Convention, there is no identified reason why the Transactions or the Transaction Documents should be regarded as invalid. Accordingly, by the application of Article 8(1), the material validity of the Transactions is to be assessed by reference to English law.

However, if the legal grounds of invalidity relied upon by Pesaro in the Italian proceedings as a matter of Italian law relate to Pesaro’s “capacity” or power to enter into the Transactions, that is a matter for Italian law (Dicey, Morris & Collins on The Conflict of Laws (16th ed., 2022), Rule 187 and para. 30-021 - 30-023). The matter of the capacity of a body corporate or unincorporate is excluded from the scope of the Rome Convention by Article 1(c).

In Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579; [2012] QB 549, Aikens, LJ said at para. 38, 47-48:

“38.

The objective of conflict of laws rules is to enable a court to decide which system of law is to be applied to resolve a legal question when there is a foreign, ie non-English, element, involved in an issue. In the present case the legal question is: by which system or systems of laws do you decide whether a contract, putatively governed by English law, between a Norwegian legal entity and an Irish one, is valid and binding on the Norwegian legal entity when it is alleged that the Norwegian legal entity did not have the “power” or the “capacity” to enter into the contract because of the terms of a Norwegian statute concerning the ability of kommunes to conclude contracts of loan? I have deliberately used both “powers” and “capacity” in the last sentence. The issue to be resolved is, ultimately, whether the contract is valid or void in the circumstances described …

47.

So, I return to the question: in what sense must we interpret the word “capacity” in Dicey’s rule? Counsel have found no authorities in which there is any discussion of the meaning of the word for the purposes of the rule. None of the cases cited in the footnotes to Dicey assist on this point. It appears to be a novel issue. How the word “capacity” is interpreted for the purposes of the rule is, as Etherton LJ has stated in his judgment, ultimately a matter of policy. In my view it is important to remember the purpose of the rule, which is to determine which systems of laws will be used, under English conflicts rules, to decide whether a “corporation” has the ability to exercise the legal right to enter into a binding contract with a third party. If that accurately summarises the rule’s purpose, then I think, following the approach of Auld LJ in the Macmillan case [1996] 1 WLR 387, 407 that the concept of “capacity” has to be given a broader, “internationalist”, meaning and must not be confined to the narrow definition accorded by domestic English law. In my view it should be interpreted as the legal ability of a corporation to exercise specific rights, in particular, the legal ability to enter a valid contract with a third party. So I agree with the approach of Tomlinson J; for the purposes of English conflicts of laws, a lack of substantive power to conclude a contract of a particular type is equivalent to a lack of “capacity”, to use English terminology.

48.

For similar reasons, it seems to me that the concept of a corporation’s “constitution” must be given a broad, “internationalist” interpretation. It is not a question of just trying to find some document, like a royal charter, or the memorandum and articles or some other written description of what the corporation is and can do. For the purposes of this English conflict of laws rule it is necessary to examine all the sources of the powers of the corporation under consideration. This will include any constitutional documents but also relevant statutes and other rules of law of the country where the corporation was created.”

In the Italian proceedings, Pesaro contends that the Second Transaction is void for the following reasons:

On this issue, Mr Dhillon KC submitted as follows:

Of these matters, the provisions which came closest to being concerned with Pesaro’s capacity is Article 42 of TUEL, although in Deutsche Bank AG Ltd v Comune di Busto Arsizio [2021] EWHC 2706 (Comm), para. 372-373, Cockerill, J decided that this provision did not place a limit on capacity. Whether that is so or not, in my judgment, the appropriate approvals had been provided. I do not consider that the other grounds relied on by Pesaro, even if proved, would deprive Pesaro of the capacity to enter into the Transactions.

Accordingly, as these matters either do not concern Pesaro’s capacity or, if they do, they cannot be sustained on the evidence, I have reached the conclusion that Pesaro did not lack capacity and there was no issue undermining the material validity of the Transactions under English law.

Subject to one exception, namely the issue of compliance with article 3(2)(d) of Decree 389, I am satisfied that Pesaro has no real prospect of successfully defending Dexia’s claim on the grounds that the Transactions are not governed by English law (but instead by Italian law), that the Transactions did not comply with Italian law, and the Transactions were invalid.

I have reached these conclusions based on the evidence before the Court and the absence of any contradictory evidence. There is further no indication that Pesaro might adduce such contradictory evidence at some future time. There is no other compelling reason why the claims in question should be disposed of at trial.

The principles underlying the grant of declaratory relief by the Court was summarised by Cockerill, J in BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2020] EWHC 2436 (Comm), at para. 78, and in Deutsche Bank AG Ltd v Comune di Busto Arsizio[2022] EWHC 219 (Comm), at para. 8. In Deutsche v Busto, Cockerill, J said:

“The Court’s approach to the exercise of its discretion is succinctly summarised at paragraph 78 of the BNPP judgment:

i)

The touchstone is utility;

ii)

The deployment of negative declarations should be scrutinised and their use rejected where it would serve no useful purpose;

iii)

The prime purpose is to do justice in the particular case. Justice includes justice not only to the claimant, but also to the defendant;

iv)

The Court must consider whether the grant of declaratory relief is the most effective way of resolving the issues raised. In answering that question, the Court should consider what other options are available to resolve the issue;

v)

This emphasis on doing justice in the particular case is reflected in the limitations which are generally applied. Thus:

a)

The Court will not entertain purely hypothetical questions. It will not pronounce upon legal situations which may arise, but generally upon those which have arisen.

b)

There must in general be a real and present dispute between the parties before the Court as to the existence or extent of a legal right between them.

c)

If the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical.

vi)

Factors such as absence of positive evidence of utility and absence of concrete facts to ground the declarations may not be determinative. However, where there is such a lack in whole or in part the Court will wish to be particularly alert to the dangers of producing something which is not only not utile but may create confusion.”

Mr Dhillon KC on behalf of Dexia submitted that this is an appropriate case for declaratory relief, because:

I accept Mr Dhillon KC’s submission, which in my judgment underwrites the utility and justice of the declarations to be made, in principle.

I now turn to the individual declarations for which Dexia claim in these proceedings.

The claims for declarations for which Dexia applies for summary judgment are set out in Dexia’s Particulars of Claim and in its amended Claim Form.

The declarations sought by Dexia are as follows (the highlighted corrections reflect the amendments made by Dexia to its Claim Form, which I have permitted as explained above):

For the reasons explained above, I allow Dexia’s application for summary judgment