Banca Intesa Sanpaolo Spa & Anor. v Comune Di Venezia

The Claimants (the Banks which expression, as the context requires, also extends to the Claimants’ predecessors in title) seek declarations that certain interest rate swap (IRS) transactions (the Transactions) which they say they entered into with the Defendant (Venice) on the terms of the 1992 ISDA Master Agreement are valid and binding, and alternative relief in contract and tort if it is found they are not.

ii)

Venice seeks declarations that the Transactions are not valid and binding (and consequential relief in unjust enrichment), and alternatively relief in contract and tort if it is found that they are.

Venice contends that, for various reasons, it lacked the substantive power to enter into the Transactions as a matter of Italian law, and that, applying English conflict of law principles, that means that it did not have capacity to enter into the Transactions and that they are not valid.

The Banks deny that the entry into the Transactions contravened any provisions of Italian law, on the basis of arguments as to the effect of Italian law and its application to the facts of this case, and further deny that any such contravention would deprive Venice of capacity to contract as a matter of English conflict of laws principles in any event.

Venice also contends that the Transactions breached various rules of Italian law which have the status of “mandatory rules of law” for the purposes of Article 3(3) of the European Union Convention 80/934/EEC (the Rome Convention) and that as a result the Transactions are void and/or unenforceable.

On this basis, Venice claims restitution of the net amounts paid under the Transactions to date. The Banks contend that they have a defence of change of position to these claims, and that Venice’s claims are time-barred.

If the Transactions are valid and binding, Venice alleges that the Banks owed Venice a non-contractual advisory duty to assess the suitability of the Transactions, which was breached, and that Venice has suffered loss as a result.

If the Transactions are not valid and binding, the Banks allege that Venice was in breach of various contractual duties or is liable to it in respect of various misrepresentations and/or misstatements, for which they claim damages.

Mr Samir Belarbi, who at the relevant time was Head of the Debt Management Desk in the Seecond Claimant’s (Dexia’s) Public Finance Division in Italy;

Mr Carlo Gabbi, who at the relevant time was Head of Local Authorities in the Debt Capital Markets Division in the Investment Banking Team at Banca IMI, which formed part of the Intesa Sanpaolo Group; and

Mr Marino Binetti, who at the relevant time worked for Banca Intesa Infrastrutture e Sviluppo S.p.A. (BIIS) as a relationship manager for the region of Northeastern Italy (which included Venice).

Mr Piero Dei Rossi, who was the Director of Venice’s Finance Department between 2000 and 2017; and

Ms Gabriella Mutti, who from 1999 to 2017 was the officer in charge of the Venice Loan and Mortgage Office and reported to Mr Dei Rossi.

Venice also put into evidence a statement from Mr Enzo Faro, who at the relevant time was a senior consultant at Brady Italia SRL (Brady Italia). This evidence was not challenged by the Bank.

Professor Torchia, a Professor of Administrative Law at the University of Study of Rome “Roma Tre”, called by the Banks; and

Professor Domenichelli, who was formerly a President of Administrative Law at the University of Padua, called by Venice.

Professor Gentili, Emeritus Professor of Civil Law at Università Roma, called by the Banks; and

Professor Sciarrone Alibrandi, a Professor of Banking Law and Financial Markets Law at the Università Cattolica del Sacro Cuore, called by Venice.

Professor Alibrandi had a tendency to give “lengthy and discursive answers which failed to engage with the questions”, provided answers which went beyond the questions asked and failed “scrupulously to maintain her independence”, adopting “the role of an advocate for Venice”;

Professor Domenichelli was reluctant to give direct answers to straightforward questions and tended to add “non-responsive” elaboration, and the court could not be confident that he “fully understood his duty to maintain his independence rather than adopt a partisan approach”.

As a preliminary matter, they do not make appropriate allowance for the difficulties of experts being cross-examined on highly technical subjects through the intermediation of translation, with the attendant possibility of the intended meaning being lost at both stages of the translation exercise.

I accept that (as with many expert academics addressing their own discipline) there were occasions when Professor Alibrandi gave longer answers than the process of cross-examination in a tightly time-tabled trial can allow for. This was exacerbated by a tendency for the questions put to her to “parse” topics into smaller elements, which Professor Alibrandi did not regard as informative in isolation. However, she responded to the court’s request that she seek to give shorter answers whenever possible. I am satisfied that in answering questions in the way in which she initially did, Professor Alibrandi was not seeking to avoid answering the questions or to be unhelpful – indeed quite the opposite.

Further, there was something of a clash of “the two cultures” when Mr Dhillon KC sought to test the evidence of both Venice’s Italian law experts by reference to its implications for the practicalities of entering into swap transactions or the security of such transactions, considerations which those experts did not regard as relevant to the issues they had been asked to address or within their expertise.

I do not accept that any of the experts (on either side) deliberately sought to withhold what they believed to be relevant materials from the court.

The reality is, as I explain below, that the Italian Supreme Court has expressed views which would involve a fundamental restatement of a number of the issues of Italian law debated in this case. Many respectable Italian scholars approve of that development (as is clear from some of the commentaries placed before the court), and in any event are prepared to treat that reformulation as the best statement of Italian law as it now stands. Professors Alibrandi and Domenichelli are among their number. Others (including Professors Torchia and Gentili) do not share that view, believing that the Supreme Court has sought to derive legal doctrines from legislative sources which those instruments cannot support, and has interpreted other court decisions in ways they do not regard as tenable.

That difference in view, and the reasons for it, were always going to give rise to fundamentally different approaches by the experts to the issues of Italian law in this case: Professors Alibrandi and Domenichelli inevitably sought to rely on the (significant volume of) recent court decisions which have tended to favour Venice’s arguments, and Professors Torchia and Gentili to emphasise the legislative provisions and administrative decrees whose meanings, in their view, have been distorted or misunderstood by those recent decisions.

That does not make the evidence of any expert partisan. I am fully satisfied that the views expressed by Professors Alibrandi and Domenichelli (like those of Professors Torchia and Gentili), be they right or wrong, are genuinely held, and fall within the spectrum of legitimate academic opinion on these difficult topics.

Mr Pawan Malik of Delphinus Advisory (and formerly Global Head of Derivative Counterparty Risk Management Solutions with Barclays Capital), called by the Banks; and

Ms Jackie Bowie of Chatham Financial, an expert advisory service for clients seeking to enter into IRS transactions, called by Venice.

The City Council of Venice (the City Council). The City Council is the democratically elected body of the municipality. I accept Professor Torchia’s evidence that the City Council’s function was to set policy, but that it was not an executive body.

The executive body (the City Board) comprised of the senior civil servants (the Directors) who were responsible for implementing policy as determined by the City Council. The key Director in this case was the Director of the Finance Department, Mr Dei Rossi.

“b. to authorise the issue of one or more bond loans for a total of total of €156,082,620.00, including placement commissions, for the reasons indicated in the introduction, and the features and terms of which are set out in Annex A to this resolution and form an integral and substantial part thereof, thus also authorising swap transactions where necessary and appropriate to hedge any interest rate fluctuations …

d. to delegate to the Central Finance and Budget Directorate the drafting of all the acts resulting from this resolution and the negotiation and signing of the relevant transactions and contractual documentation.”

The notional value was equal to €156,082,000 (i.e., the amount of the Rialto Bond) for the initial Calculation Period, and then reducing in accordance with the table at Appendix 1 of the confirmation.

The maturity date was 23 December 2005, with interest payable in June and December each year.

Venice would receive from Bear Stearns the 6-month EURIBOR variable rate plus 17 basis points (0.17%).

Venice would pay Bear Stearns the USD-LIBOR-BBA variable rate plus 95 basis points (0.95%), with a cap at 5.55% and a floor at 1.3%.

for the period from 23 June 2004 until 23 December 2006, 6-month EURIBOR minus 5 basis points, with a cap of 6% and a floor of between 2.1% and 2.5%;

from 23 December 2006 until 23 December 2022, 6-month EURIBOR with a variable spread falling from 1.50620% to -0.1997%, subject to a cap rate of 7% and a barrier rate of between 3.944% and 5.662% (depending on the period) where, if 6-month EURIBOR fell below the barrier rate, Venice would pay 5.45%.

“This Administration, in order to free up resources in the Municipality’s balance sheet, intends to proceed with the restructuring of the 20-years bond named “Rialto” issued in December 2002 with Bank Akros for an amount equal to Euro 156.082.000,00. For this reason, the Administration invites this financial institution to formulate within the 19 c.m. a proposal to remodulate the above-mentioned debt, whose outstanding amount is as of today equal to Euro 129.267.112,40, containing the following main characteristics:

•

Extension of the maturity from 2022 to 2037;

• Profile of amortization of the “amortizing” capital;

• Recovery of the resources in 2007 and 2008 with respect to the actual situation of circa Euro 7.000.000,00 for each year;

This administration also kindly request the financial institution both to deliver a proposal for an eventual derivative’s transaction relating to the bond’s issuance and to communicate its rating.”

It is attached to this communication:

• Amortization plan of the bond “Rialto”;

• Swap contract in place at the moment.

Moreover, this Administration considers completing its request by establishing a partnership relationship. The membership to the “Club dei Amici di Venezia [Club of the Friends of Venice] recently established and which for the time being count the accession of three companies leaders in their field, allows the new “Friend” to become a partner of Venice and focus its communication on the image of the city, in this way actively operating to safeguard the city’s cultural, artistic assets and traditions. The status of Friends of Venice determines a partnership relationship with the Municipality of at least three years. To those companies which decide to become members, it is requested a minimum financial contribution equal to Euro 900.000,00 to be made during the entire relationship in exchange for the great visibility offered. The communication plan can be conveniently adapted to the specific needs of the company.”

Banca Opi and BIIS wrote to Venice with an offer to restructure the Rialto Bond, comprising an advisory stage (involving assisting Venice in calling and organising the meeting of bondholders) and a subsequent IRS stage, including the cancellation of Venice’s debts under the Bear Stearns IRS. The letter stated that if the “offer proposal” is accepted, the bank would undertake to carry out various activities including:

“Advise on the completion of operations involving derivative financial instruments aimed at optimizing the cost of the bond issue."

Dexia wrote to Venice with a debt restructuring proposal presentation which contained a renegotiation proposal for the Rialto Bond and a swap restructuring proposal. Dexia indicated that it would be prepared to operate with other banking counterparties.

the provision by the Banks of assistance to Venice in relation to the calling and organising of a meeting of the Rialto Bond holders, at which a debt restructuring plan would be presented; and

the entry into by the Banks and Venice of IRS transactions to replace the Bear Stearns IRS.

By a cover letter enclosing the Joint Proposal, Intesa offered to pay €930,000 to Venice as a contribution to join the Amici di Venezia (Friends of Venice), conditional on execution of the bond and derivative restructuring.

“Please note that after carefully examining the offers received concerning the restructuring of the ‘Rialto’ bond and participation in the ‘Friends of Venice Club’, the Administration has decided to award the aforementioned transactions to your bank. You will be contacted in the coming days to proceed with task.”

Venice granted the Banks (and BIIS) a joint mandate for the ‘Operation’ in the role of Co-Arrangers, Co-Consent Coordinators and Dealers: Article 1.

Recital C defined the ‘Operation’ as “a proposal to restructure [Venice’s] debt, consisting of the renegotiation of the financial terms and conditions of the [Rialto Bond], also through an extension of the maturity from 2022 to 2037, and the remodulation of the overlying derivatives operation”.

By Article 1, Venice undertook to negotiate in good faith exclusively with the Banks (and BIIS) as swap counterparties on the terms and conditions for the execution of the restructuring of the derivative position in relation to the Rialto Bond.

No commission would be payable by Venice to the Banks for the services to be provided under the Mandate Agreement: Article 2.

The Banks’ mandate was exclusive and would last until 29 February 2009. In the event that the City Council did not approve the ‘Operation’, the mandate would lapse: Article 7.

There is a dispute over whether or not Article 3 of the Mandate Agreement required the Banks to advise Venice on the restructuring of the derivative position.

To extend the maturity of the bond by an additional 15 years from 2022 to 2037 (extending the average financial life from the current 8 to 20 years), thereby achieving a more convenient rescheduling of budgetary commitments;

To benefit from the extension of the loan at competitive conditions related to the new duration, with a maximum indicative coupon equal to Euribor 6m + 23 bps;

To free up resources of about €12 million in capital until the end of 2008.”

“Following the acceptance by the bondholders of the proposed new terms and conditions and therefore the renegotiation of the bond loan, the Municipality will also carry out the restructuring of the derivative entered into in 2004 with Bear Stearns whose underlying item is the international issue in question. The legislation (Article 3 of the Circular of 27 May 2004 explaining Ministerial Decree No. 389 of 2003) provides, inter alia, that “in the event of a change in the underlying liability of a derivative, for example because it has been renegotiated [...], the position in the derivative instrument may be readjusted on the basis of conditions that do not result in a loss for the Body.

Article 3(f) of the same Decree No. 389 further provides that the flows received by institutions through derivative transactions must be equal to those paid in the underlying liability.

Therefore, the Municipality, in unwinding the existing derivative, will refer to the relevant legislation in force, pursuing the objectives of an efficient active debt management and adjusting the existing derivative not only to the new underlying but also to the changed market conditions.”

“Given that the Programmed Forecast Report for the 2007-2008 three-year period, attached to the 2007 Budget approved by Council Resolution No. 19 of 26 February 2007, provides for the active management of debt among the objectives to be achieved in the field of financial policies;

….. Considering that, with [Resolution 194] the City Council authorised the issuance of the [Rialto Bond];

Given the resolution of the Municipal Board of 21 June 2007, No. 345 (mandate for the performance of the restructuring of the [Rialto Bond]) through which the aforesaid Council, in execution of the aforementioned Budget Report, after selection by invitation of primary banking institutions, activated with note protocol No. 160285 of 12 April 2007, jointly gave mandate to [BIIS and the Banks], as Co-Arrangers, Co-Consent Coordinators and Dealers in relation to the restructuring of the [Rialto Bond];

Considered, in particular, that the joint proposal received from the aforementioned credit institutions provides for the possibility of modifying certain terms and conditions of the [Rialto Bond], including the extension of the maturity of the securities, from the current one scheduled for December 2022 up to a maximum maturity of 2037, the change in the interest rate margin, as well as the restructuring of the derivative transaction to cover the interest rate risk associated with the aforesaid issue;

Considering also that the above proposal is subject to the interest in the renegotiation of the terms and conditions of the bond in question by the present holders of the bonds;

Considered that the aforementioned proposal is of interest to the Municipality of Venice in consideration of the current levels of long-term interest rates and the fact that the City could achieve savings on the service of the debt by means of the aforesaid amendment to the terms and conditions of the debenture loan;

Considering that the Municipality of Venice, as stated by the [Finance Director] is not in a situation of disruption or in structurally loss-making situations as defined by Article 242 of the Legislative Decree No. 267 of 18 August 2000, and that no budget deficits are recorded in the penultimate final balance;

Considering that all the costs foreseen for this operation are included in the budget for the current year; Without prejudice to the fact that, following the restructuring and renegotiation of the loan, a new financial amortisation plan must be prepared for the restructured debenture loan (Annex 1)… .”

authorise the changes to the terms and conditions of the Rialto Bond (Resolution 7);

“also authorise the restructuring of the existing derivative transaction in relation to the [Rialto Bond] in the most appropriate forms, including the replacement of the original counterparty with the banking institutions appointed as Co-arrangers, Co-consent Coordinators and Dealers indicated in the recitals in relation to the [Rialto Bond] referred to in point 7 above), also proceeding to the drafting of the relevant ISDA contract, if applicable” (Resolution 8);

authorise the Finance Department to carry out all the acts resulting from Resolution 129 (resolution 9), including:

“d. the negotiation and execution of the documentation necessary for the restructuring of the derivatives transaction relating to the same debenture loan, in compliance with the provisions of Article 41 of Law no. 448/2001 and the related implementation provisions, including the ISDA documentation (Master Agreement and Schedule) with the new “Swap” counterparties referred to in point 8 above, as well as the definition of the final terms and conditions of these restructuring transactions.”

“I would like to remind you that the City Council asked me to be supported in the choices we make by a third party, which we identified as Brady Italia”.

Banca IMI (Giovanni D’Aversa) sent an email to Brady Italia (Mr Faro) attaching the Bear Stearns IRS Confirmation and the term-sheet for the Transactions.

Mr D’Aversa spoke to Mr Faro of Brady Italia, and then reported that Mr Faro had been surprised at the tight timetable for the closing of the derivative, about which he said he had not been notified by Venice.

Ms Mutti faxed Banca Opi a copy of Resolution 129.

Mr Dei Rossi contacted Bear Stearns (Mr Gaudenzi) asking it to give consent to Venice’s request to transfer the Bear Stearns IRS to the Banks.

Mr Dei Rossi completed a ‘Retail Customer’ questionnaire for Banca Opi, which, amongst other things, identified Venice’s objectives as “Optimising the financial management of existing transactions, also taking limited risks”, and described Venice’s interest rate expectation as being “stability or an increase”.

Mr Dei Rossi also completed a “MiFID – Customer Profiling Questionnaire: Debt Management” for Dexia, which recorded amongst other things, that Venice was familiar with “Plain vanilla derivatives (including products with cap and floor options)”, that its valuations underlying financial choices were usually made “by an internal structure”, that derivative transactions were monitored “with the support of an external structure”, and that the objectives of its debt management strategy included both “containing the cost of debt within a predefined range, including through its stabilisation at a constant level”, and “Reducing the cost of debt by accepting the possibility of its potential increase”.

Executive Resolution no. 3553 signed by Venice’s Finance Director approving the terms of the restructured Rialto Bond was included in the Register of the Resolutions of the Manager.

Banca Opi (Ms Battista) emailed Venice and its advisors setting out the procedural steps to be taken in order to effect the Transactions.

Mr Dei Rossi passed Executive Resolution no. 3561 which provided:

“Object: Execution of the derivative transaction in relation to the restructuring of the bond of EUR 156.082.000,00 entered into on 20 December 2007 – Implementation of the Municipality’s Council resolution no. 129 of 25 September 2007…

Having considered that on 20 December 2007 the Municipality of Venezia has restructured the 30-years floating rate bond whose original amount was qual (sic) to EUR 156.082.000,00, as resolved by the Council Resolution no. 129 of 25 September 2007;

Having considered that the Municipality’s Council Resolution no. 129 of 25 September 2007, which authorized the Municipality of Venezia to proceed with the restructuring of the abovementioned bond, also authorized the Finance and Accounts Interdepartmental Office to restructure the derivative transaction associated with such bond to hedge the interest rate risk;

Having regard to the Municipality’s Board Resolution of 21 June 2007 no. 345, which conferred a joint mandate to Banca Intesa Infrastrutture e Sviluppo S.p.A., Banca OPI S.p.A. and Dexia Crediop S.p.A. as Co-arranger, Co-Consent Coordinators and Dealers for the restructuring of the bond as well as the restructuring of the derivative transaction associated with the bond;

Having acknowledged that, in agreement with the swap counterparties (Banca Opi Spa, e Dexia Crediop Spa) have been agreed the terms of the derivative transaction whose underlying is the bond mentioned above, as well as the final versions of the relevant Confirmation, the ISDA Documentation (Master Agreement and Schedule) and the Novation Confirmation, which will be used for the assignment to Banca OPI and Dexia Crediop of the swap contract currently in place between the Municipality and Bear Stearns;

Having recognised the need to approve the final versions of the aforementioned agreed documents;

Having considered that the abovementioned documentation shall be sent to the Ministry of Economics and Finance pursuant to Article 1, para. 737 of Law no. 296 of 27 December 2007 and relevant Circular dated 31 January 2007, as condition precedent for the effectiveness of the transaction.

DETERMINES

1.

to approve, in compliance with the Municipality’s Council resolution no. 129 of 25 September 2007, the terms and conditions of the derivative transaction, as better described in the Confirmation attached hereto;

2.

to approve the execution with Banca OPI and Dexia Crediop of the contractual documentation relating to the transaction (ISDA Master Agreement and relevant Schedule, Novation Confirmation and Confirmation) in the versions attached hereto and which form an integral part of the present resolution.”

Dexia (Ms Battista) emailed Venice a letter headed “Information document on the nature and risks relating to transactions in derivative financial instruments /swap” (which Mr Dei Rossi signed).

Venice (Mr Dei Rossi) emailed Bear Stearns to request the assignment of the Bear Stearns IRS to the Banks, and Dexia (Mr Belarbi) emailed Bear Stearns a draft of the novation confirmation the Banks proposed to use.

Venice (by a letter signed by Mr Dei Rossi) wrote to the Italian Ministry of Economy and Finance (MEF) notifying it pursuant to Article 41(2)(ii) of Law no. 488 of 2001 (as amended by Article 1, paragraph 737 of Law No. 296/2006) of the restructuring of the Rialto Bond and the Transactions. The letter attached (among other things) the draft Transaction Documents (the Transaction Documents) and stated:

“Following the renegotiation of the above-mentioned international bond effective as of today, it is necessary (including under Article 3, paragraph 3 of Italian Ministerial Decree of Economy and Finance No. 389/2003 and the Ministerial Circular of 27 May 2004 and as specified by Article 1, paragraph 736 of Italian Law No. 296/2001 and the relevant circular of the Ministry of Economy and Finance of 31 January 2007), to restructure the derivative transaction entered into on 19 December 2005 in respect of the bond itself to adapt the swap to the new financial characteristics of the underlying bond.

The Municipality, following an informal call for tenders in accordance with Articles 19 and 27 of Italian Legislative Decree No. 163/2006, on 28 May 2007 appointed [the Banks] as of Co-Arranger, Co-Consent Coordinator and Dealers in in relation to the restructuring of the “Rialto” bond issue and the subsequent restructuring of the outstanding derivative transaction for the completion of the renegotiation of the abovementioned bond and for the restructuring of the of the related derivative transaction. Therefore, it is the intention of this City Council to proceed on 20 December 2007, with the restructuring of the above-mentioned swap contract (also following their assignment) and the conclusion of a new swap (the “Transaction”), all with a view to optimising the cost of issuing the international bond under the new terms and conditions resulting from the renegotiation of the latter. It should be noted that this City Council has decided to finalise the interest rate swap transaction, not for speculative purposes, but solely for the purpose of the hedging interest rate risk and for the proper management of its liabilities. It should also be noted that the above transactions are carried out on underlying amounts that are actually due from the Public Entity.”

an ISDA Master Agreement with accompanying schedules with each of the Banks, in English (together the Venice Master Agreement); and

a confirmation for each of the Banks recording the terms of the relevant trades, in Italian (together the Confirmation).

The Trade Dates were 21 December 2007, the Effective Dates were 23 June 2007 and the Termination Dates were 23 December 2037.

The initial Notional Amount on the Opi Confirmation was €85,154,842.96, decreasing in accordance with the amortisation schedule at Annex A to the Opi Confirmation. The initial Notional Amount on the Dexia Confirmation was €40,072,867.28, decreasing in accordance with the amortisation schedule at Annex A to the Dexia Confirmation.

Venice agreed to pay the Banks interest on the Notional Amounts (from time to time) as follows:

a)

For the period 23 June 2007 to 23 December 2007, at a variable rate equal to 6 month Euribor plus 0.17% per annum.

b)

For the period from 23 December 2007 to 23 June 2010:

i)

At a Nominal Annual Fixed Rate of 4.67% if 6 month Euribor was less than or equal to the ‘strike floor’ of 4.5%;

ii)

At a variable rate equal to 6 month Euribor plus 0.17% per annum if 6 month Euribor was greater than 4.5% and less than or equal to 6.50%; or

iii)

At a Nominal Annual Fixed Rate of 6.67% per annum if 6 month Euribor was greater than the ‘strike cap’ of 6.5%;

c)

For the period from 23 June 2010 to 23 December 2037:

i)

at a Nominal Annual Fixed Rate of 5.465% if 6 month Euribor is less than or equal to the ‘strike floor’ of 5.255%;

ii)

at a variable rate equal to 6 month Euribor plus 0.21% per annum if 6 month Euribor is greater than 5.255% and less than or equal to 6.79%; or

iii)

at a Nominal Annual Fixed Rate of 7% per annum if 6 month Euribor was greater than the ‘strike cap’ of 6.79%.

d)

The Banks agreed to pay Venice interest on the Notional Amounts (from time to time), as follows:

i)

at a variable rate equal to 6 month Euribor plus 0.17% per annum for the period 23 June 2007 to 23 December 2007; and

ii)

at a variable rate equal to 6 month Euribor plus 0.21% per annum for the period from 23 December 2007 to 23 December 2037.

e)

The Payment Dates would be every 23 June and 23 December, commencing on 23 December 2007 and ending on 23 December 2037.

f)

The Calculation Periods were 6 month periods, from 23 June 2007 to 23 December 2037.

68% of the Notional Amount of the Bear Stearns IRS, which was equal to €85,154,842.96, be assigned from Bear Stearns to Banca Opi in consideration for a fee of €5,484,200.

32% of the Notional Amount of the Bear Stearns IRS, which was equal to €40,072,867.28, be assigned from Bear Stearns to Dexia in consideration for a fee of €2,580,800 paid from Dexia to Bear Stearns.

Banca Opi entered into a back-to-back IRS with Banca IMI S.p.A;

Dexia entered into a back-to-back IRS with Barclays Capital (a division of Barclays Bank plc). Dexia’s 1992 ISDA Master Agreement with Barclays is dated 25 June 2003.

“With respect to this derivative transaction, it should be noted that the underlying debt transaction for an original amount of EUR 156,082,000.00 (ISIN code XS0160255856) was restructured on 20 December 2007 with an extension of the maturity date to 23 December 2037 at a variable rate equal to the six-month Euribor plus 0.21 p.p.a.”

“due to low incoming cash flow against the risks of the derivative transactions in place, and what costs were incurred to exit the Rialto bond issue after endless restructures following the first contract signed in 2002 with Bear Stearns, converted on 20 December 2007 into a new derivative, this time with Dexia Crediop - OPI Bank with maturity 23 December 2037”.

arrive at any quantitative assessment of the likelihood of that happening;

assess the MTM of the floor, cap or the Transactions;

reach an informed view of their own of the likelihood of interest rates rising above the cap or falling below the floor during the life of the Transactions; nor

assess the effect of covering the negative MTM of the Bear Stearns IRS within the proposed terms on the economics of the Transactions.

the Bear Stearns IRS, which also had a collar structure and was therefore a structured rather than “vanilla” swap, and the two amendments thereto negotiated in 2003 and 2004; and

three other derivatives contracts: two with Merrill Lynch (executed in May 2004 and March 2007), and one with Barclays (executed in April
2005), for which Mr Dei Rossi was once again responsible.

There is no evidence of any particularly informed internal assessment of the competing proposals by the Finance Department in 2007. The only document seeking to do so is a spreadsheet prepared by Ms Mutti – who, on the Banks’ characterisation, performed an essentially administrative role – and Venice was right to describe that assessment as rudimentary, both in the lack of any consideration of the MTM of the proposals or their relationship with the forward rates curve, and particularly in only considering the period to December 2008 (over which period, the Banks’ proposals brought Venice early benefits, with the net payments moving against Venice after that).

While the Note on Derivatives prepared by Venice in June 2008 suggested a relatively sophisticated understanding of derivatives, I have concluded on the evidence that this was prepared with the benefit of input from Mr Diprima, who had joined Venice in 2008 from Intesa, and who had the financial market expertise which Mr Dei Rossi and Ms Mutti lacked. Mr Dei Rossi’s acceptance in cross-examination that he had prepared the document was either a lapse in memory, or a reflection of the fact that he had overall responsibility for the document as Finance Director.

“a) cancel the negative differentials provided on 24 December 2007 by the previous derivative transaction;

b) set a positive differential for the first half of 2008;

c) have a more favourable overall structure until 23 June 2010; and

d) increase the market risk of the derivative in terms of ‘overall effects on cash flows’ as a result of the extension of the maturity by 15 years and the change in the spread and the floor”.

Ms Orsi confirmed, in answer to Dexia (Mr Nardiello), that the term sheet for the Transactions was clear and that Brady Italia agreed and approved its terms. She also made a reference to the fact that the 5.225% rate featured was slightly more favourable for Venice than the previous 5.26% rate. I accept that she would not have responded to the request for confirmation that Brady Italia had approved the Transactions unless Brady Italia had at least looked at the terms, and not identified any immediate issue with them.

When asked whether Venice approved the Transactions, Mr Dei Rossi said that “the last check” was “with Brady” and asked Ms Orsi “what does Brady say about this”? Ms Orsi replied “yes”, and then gave the indicative MTM valuation. Once again, I accept that Ms Orsi would not have done this without Brady Italia having performed some level of review of the Transactions, including performing their own MTM review.

The two POLEIS valuations later attached to the Brady Report, and dated 21 December 2007, may well have been available to Ms Orsi during this call.

There are no communications and nothing by way of metadata which support the provision of a draft at any earlier stage.

The earliest reference to a draft is dated 24 January 2008, which was discussed internally within Venice during February 2008, leading to at least one suggestion from Venice (made by Mr Diprima, who had joined Venice’s Finance Department after the Transactions had been entered into) as to a subject which should be addressed within the finalised report.

The Brady Report was finalised by 27 February 2008. There are two Word copies of the Brady Report which the metadata shows were created on 27 February and 29 February 2008 respectively which contain the information which Mr Diprima had suggested be added on 21 February 2008.

I do not believe that Brady Italia would have had time to produce any substantial written document and send it to Venice for its review in the period between 19 and 21 December 2007.

“36. Market participants use a type of calculation known as ‘mark to market”, commonly abbreviated to ‘MTM’ … [The experts] agree that MTM is generally understood in its simplest form to mean the present value of the expected cash-flows, calculated according to a series of generally accepted conventions.

How this works can be seen by starting from a theoretical base in relation to the two legs of the simple IRS ... The present value of future cash flows is obtained by discounting them at market rates. If, on inception, each rate is the same as the current market discount rate then the swap is theoretically at par – each leg has a present value of zero because the promised rates equate to what can, in theory at least, be obtained in the market. In this theoretical example the MTM on inception will be zero for both sides, because the present value of what will have to be paid by the fixed leg is neither higher nor lower than the present value of what will have to be paid by the floating leg.

However, if the annual discount rate in the market differs from the fixed rate under the swap, then the present value of the fixed rate leg will no longer be zero. [One expert – Mr Malik, as it happens] gives an example where the swap is for a period of a year with a notional sum of €;100. Under a notional loan of €100 the notional repayment by a fixed rate borrower at the end of the year will be €105, comprising the principal of €100 and interest of €5. If the annual discount rate goes up from 5% to 6%, then the party paying the fixed rate will be paying in a year's time interest of €5 while the market would now be willing to promise to pay 6% at the end of a year. That entitlement to pay less than the market rate, when applied to a notional sum of €100, gives the fixed rate leg a positive present value of €0.95 – because at the rate of 6% that the market would give, it would be necessary only to invest €99.05 in order be entitled in a year's time to a repayment of €105. Making a further theoretical assumption that 1M Euribor is unchanged, the floating leg would continue to have a value of zero. The result will thus be that this simple IRS for a term of a year on a notional sum of €100 will have a positive revised MTM for the fixed rate payer of €0.95, and a negative revised MTM for the floating rate payer of €0.95.

More commonly a transaction will be more complex, involving floors or caps or other components. If so, the MTM of the transaction will be the sum of the MTM of each component.

In practice there will be numerous other complexities to take account of. One such will be the spread between bid and offer rates. In relation to any financial product traded between banks, what a bank will be prepared to pay will be less than what it will offer to receive. This difference is the spread charged by the bank for acting as market maker. One way of taking account of it is to calculate MTM on the basis of a mid-market rate halfway between the two.”

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.

In framing the issue in this way, one is classifying, or characterising, the nature of the legal issue that has to be decided. Traditionally, that is the first stage in identifying the appropriate system of law which is to be applied to deal with the issue when non-English elements are involved, as here. The second stage is to select the rule of conflict of laws which lays down a ‘connecting factor’ to the relevant foreign element for that issue. And the final stage is to identify the system of law which is tied by the connecting factor to that issue.”

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.

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.”

issues of illegality (English law taking a notably restrictive review as to the circumstances in which foreign law illegality is capable of impugning an English law contract); and

issues of authority (because, as explained at [113] below, the fact that an agent lacks actual authority as a matter of the applicable foreign law to enter into an English law contract is not necessarily fatal to the validity of that contract).

The concepts of ultra vires and illegality were not clearly distinguished when the ultra vires doctrine was first established in English law and have not always been clearly distinguished since. But the distinction is important. The term ultra vires, in its strict sense in which it has properly been used by the courts below in this action, refers to a situation where a corporation has no legal power (or capacity, as it is often put) to enter into a transaction. That is different from saying that it is against the law for the corporation to enter into a transaction. The two may coincide. There could in principle be a case where, for example, a corporation does not have the power to make a contract and where, even if it did have such power, it would be illegal for the corporation to do so. But lack of power or capacity and illegality are different concepts and the legal consequences of each may differ.

A third concept which has not always been clearly distinguished from ultra vires is that of lack of authority of a person or body to act for a corporation. Thus, it may be argued that, for example, a contract entered into or approved by the board of directors of a company is not binding on the company on the ground that it was beyond the powers of the board to make such a contract. This is different from saying that the company itself did not have the power to make the contract. It is a question of agency, governed by the law of agency.”

Where the statute in question is of general application, rather than relating to a particular type of legal person, the argument for treating it as part of the corporation’s constitution capable of raising an issue of capacity as a matter of English law analysis (as opposed to imposing a general legal prohibition on activities of a particular kind) will be weak. The more specific the application of the statute to a particular type of legal entity (e.g. a statute applying to a local authority or particular types of public body), the correspondingly stronger the argument that it defines the legal abilities or substantive powers of the corporation.

Where the proscribed activity is of a kind which is inherently wrongful, the statute in question is more likely to be a prohibition. Where, by contrast, it proscribes a particular kind of legal entity entering into a type of contract which other legal and/or natural persons are free to enter into, it is more likely that the statute is defining the legal abilities or substantive powers of the subject corporation.

Where the statute in question is both the legal source of the corporation’s power to undertake a particular act, and the source of qualifications or limitations on that power the contravention of which makes the transaction void (for example where the statute confers a power to borrow on a local authority but only with national government consent, and provides that loan transactions undertaken without such consent are void), the restrictions are more likely to constitute limitations on the legal ability or substantive power of the corporation to enter into a valid contract of that kind, rather than a prohibition. In Haugesund, [58], Aikens LJ noted that the effect of the statutory provision in issue was:

“both to grant power … to conclude certain types of loan contract and also to restrict their power to conclude certain types of loan … Tomlinson J was well aware of the distinction between the communes having the power to enter into the swaps contracts but being prohibited from doing so as opposed to the communes not having power to do so at all. In my view he correctly concluded that the effect of [the provision] was the latter and not the former”.

The fact that, under the legal system in question, legal persons have general capacity to enter into contracts is not necessarily determinative of the question of whether other limitations on the freedom of the corporation to enter into valid contracts of a particular kind raise issues of capacity as a matter of English law categorisation. Taking a legal system which both recognises a general capacity of legal persons, but also a provision of the kind considered in the previous sub-paragraph, that can be rationalised on the basis that a lex specialis overrides a lex generalis.

The question of whether an agent has actual authority to commit its principal to an English law contract is governed by the law applicable to the relationship between the principal and agent.

The apparent authority of that agent to commit the principal to such a contract, and the question of whether the principal has subsequently ratified the contract, are governed by English law.

The consequences of the agent’s lack of authority (actual or apparent) and the consequences of ratification of the English law contract are matters of English law.

(Vestia, [276] and Deutsche Bank AG London v Comune di Busto Arsizio [2021] EWHC 2706 (Comm), [377] and [382] ( Busto )).

“What the plaintiffs have done in the present actions is in the first place to assert and to rely upon Greek law, but to set up Greek law in the form in which it was enacted in February, 1953, and which was to their advantage and to claim to be entitled to ignore the amendments to the Greek law made in July, 1956, which are to their disadvantage. The question raised in the appeals is whether so singular a process of selectiveness can be justified.

It seems to us that those who need recourse to Greek law must take it as they find it. If they assert that Greek law can endow, they must recognise that Greek law can disendow. If they aver that Greek law can create, they must accept that Greek law can change. If they need to have the foundation of Greek law upon which to build a claim, they can hardly say that Greek law as it used to be suits them far better than Greek law as it is”.

Viscount Simonds held that, once the contractual obligation governed by English law had come into existence, no alteration of Greek law would be effective in an English court to discharge that obligation as a matter of conflicts of law analysis (pp.274-275).

Lord Reid held that the effect of the 1953 legislation was that the successor bank became bound to the English law contract, which obligations were thereafter independent of Greek law (p.279). The English courts could not give effect to a foreign law discharging an English law obligation to pay money in England (p.281), and the question of whether the 1956 law was seeking to discharge English law obligations was to be determined as a matter of substance and not form (pp.282-283).

Lord Radcliffe held that once the successor bank’s English law obligations had come into existence, they could not be discharged by subsequent Greek legislation, and also that “once the validity and consequences of a succession created by foreign law have become established by its rules” it would be “neither just nor convenient … that an English court … should recognise retrospective alterations of that succession which may be propounded by the foreign law” (p.284).

Lord Tucker held that the English courts would only recognise the laws of succession in the form they existed at the date of succession (p.285).

Lord Denning held that the English courts should refuse to recognise the 1953 legislation to the extent amended by the1956 legislation because that outcome was “so inconsistent with the essence of the transaction, that there is no comity of nations which requires the English courts to recognise it” (p.290).

“Instances where this power has been used in courts elsewhere suggest there could be circumstances in this country where prospective overruling would be necessary to serve the underlying objective of the courts of this country: to administer justice fairly and in accordance with the law. There could be cases where a decision on an issue of law, whether common law or statute law, was unavoidable but the decision would have such gravely unfair and disruptive consequences for past transactions or happenings that this House would be compelled to depart from the normal principles relating to the retrospective and prospective effect of court decisions.”

“Considerable weight is usually given to the decisions of foreign courts as evidence of foreign law … But the court is not bound to apply a foreign decision if it is satisfied, as a result of all the evidence, that the decision does not accurately represent the foreign law. Where foreign decisions conflict, the court may be asked to decide between them, even though in the foreign country the question still remains to be authoritatively settled.”

It was actually a “conflict of decisions” case, there being other New York authority (or decisions from other states on the same wording) to the contrary effect.

The law of New York relating to negotiable instruments was “expressed in a statute which in all material respects is identical with our own Bills of Exchange Act 1882 and was adopted for the express purposes of assimilating the law of New York to that of England” (p.654).

The decision not followed was one of a puisne judge. It was recognised, certainly by Pickford LJ, that had the decision been one of the New York Court of Appeals, the court would not have felt able to come to a different conclusion as to the position under New York law (pp.638, 644).

The argument that the Transactions were speculative, and as a local authority Venice lacked capacity to enter into speculative derivatives as a matter of Italian law (the Speculation Argument).

The argument that the Transactions constituted indebtedness other than for investment expenditure, and as a local authority Venice was not permitted to have recourse to indebtedness otherwise that for the purpose of investment (the Indebtedness Argument).

The argument that the Transactions did not receive the requisite approval from the City Council, and Venice consequently lacked capacity to enter into the Transactions (the Article 42 TUEL Argument).

"(1) Municipalities, Provinces, Metropolitan Cities and Regions shall have financial autonomy in terms of revenue and expenditure [in observance of the equilibrium of the relative budgets, and shall contribute to ensuring the observance of the economic and financial constraints deriving from the legal system of the European Union].

(2) Municipalities, Provinces, Metropolitan Cities and Regions shall have independent financial resources. They set and apply taxes and revenues of their own, in compliance with the Constitution and according to the principles of coordination of State finances and of the tax system. They have co-participation in the tax revenues related to their respective territories. …

(4) Revenues deriving from the above mentioned sources shall enable Municipalities, Provinces, Metropolitan Cities and Regions to fully finance the public functions assigned to them.

…

(6) …Municipalities, Provinces, Metropolitan Cities and Regions have their own assets, allocated to them pursuant to general principles laid down in the State law. They may have recourse to indebtedness only for the purpose of financing investment expenditures [with the simultaneous definition of amortization plans and provided that the budget balance is complied with reference to all entities of each region]. Any State guarantee on loans taken out by them is excluded.”

In order to hedge against exchange rate risk, all bonds in foreign currency must be accompanied, at the time of issuance, by a corresponding swap transaction. The swap transaction shall convert, for the issuer, the bond in foreign currency into a bond in lire, without introducing risk elements”.

The transaction is explicitly carried out to reduce the risks connected with an underlying debt instrument.

There is a ‘high correlation’ between the characteristics of the underlying debt and those of the derivative transaction.

There are procedures and internal controls within the intermediary which are sufficient to make sure that the above conditions are satisfied (the significance of this third element being a matter of dispute).

“Attributions of City and Province Councils

City and Province Councils are the political-administrative guidance and control bodies.

City and Province Councils shall be responsible only in respect of the following fundamental acts:

i) expenditure which commit the budgets for subsequent financial years, with the exception of expenditure relating to the rental of buildings and the supply of goods and services on a continuing basis.”

"(1) In order to contain the cost of debt and to monitor public finance developments, the MEF coordinates access to the capital markets of the provinces, municipalities, unions of municipalities, metropolitan cities, mountain communities and island communities … as well as consortia of local authorities and regions. To this end, these entities regularly send data on their financial situation to the Ministry. The content and data coordination and transmission methods are established by decree of the MEF to be issued jointly with the Ministry of the Interior, after consultation with the Unified Conference referred to in article 8 of Legislative Decree no. 281 of 28 August 1997, within thirty days from the date of entry into force of this law. The same decree approves the rules on debt amortisation and on the use of derivatives by the above entities.

(2) The bodies referred to in paragraph 1 may issue bonds with the reimbursement of capital in a lump sum on expiry, subject to the creation – at the moment of issuance – of a fund for amortizing debt, or subject to the conclusion of swap contracts for the amortization of the debt. Without prejudice to the provision of the relevant contractual arrangements, the entities may provide for the conversion of mortgages taken out after 31 December 1996, also through the placement of new bond issues or through the re-negotiation, also with other institutions, of mortgages, under refinancing conditions that allow a reduction of the financial value of total liabilities to be paid by the bodies themselves net of fees and of the possible downgrading of the substitute tax proceeds mentioned in article 2 of Legislative Decree no 239 of 1 April 1996, and subsequent amendments."

"In addition to the transactions referred to in paragraph 1 of this article and article 2 of this decree, the following derivative transactions are also allowed:

interest rate swap between two parties taking the commitment to regularly exchange interest flows connected to major financial market parameters according to the procedures, timing and conditions stated in the contract;

purchase of a forward rate agreement in which two parties agree on the interest rate that the buyer agrees to pay on a capital at a future date;

purchase of an interest rate cap in which the buyer is protected from increases in the interest rate payable above the set level;

purchase of an interest rate collar in which the buyer is guaranteed an interest rate to be paid, fluctuating within a pre-determined minimum and maximum;

other derivative products containing combinations of the above that enable the transition from a fixed rate to floating rate and vice versa when a predefined threshold has been reached or after an established period of time;

other derivative products aimed at restructuring debt, only if they do not have a maturity subsequent to that of the underlying liabilities. These transactions are allowed when the flows received by the interested bodies are equal to those paid in the underlying liabilities and do not involve, at the time of their conclusion, an increasing profile of the present values of single payment flows, with the exception of a discount or premium to be paid at the conclusion of the transactions, not exceeding 1% of the notional of the underlying liability."

"For entities, referred to in paragraph 16 above, pursuant to article 119(6) of the Constitution, the following constitute indebtedness: the assumption of mortgages/loans, the issue of bonds, securitizations of future flows of income not linked to a pre-existent financial activity and securitization with initial charge less than 85 percent of the market price of the object of securitization rated by an independent and specialized body. In addition, constitute indebtedness also securitizations accompanied by guarantees provided by public administrations, and securitizations and the assignment of receivables due from other public administrations. Operations that do not involve additional resources, but permit to overcome, within the maximum limit established by current State legislation, a temporary shortage of liquidity and to incur expenses that already have a suitable budget cover, do not constitute indebtedness, pursuant to the aforementioned article 119".

“For the purposes of article 119(6) of the Constitution, the following are investments:

the acquisition, construction, renovation and extraordinary maintenance of property, consisting of both residential and non-residential buildings;

b) the construction, demolition, renovation, restoration and extraordinary maintenance of works and facilities;

c) the purchase of machinery, technical and scientific equipment, means of transport and other mobile equipment for long-term use;

d) charges for non-material assets for long-term use;

e) acquisition of land, expropriation and easements;

f) share holdings and capital contributions, within the extent of the possibility to participate granted to the single borrowing institutions by their respective rules;

g) capital transfers specifically earmarked for the implementation of the investment by another agency or organization within the public administration;

h) capital transfers in favour of subjects with public works licenses, or owners or operators of facilities, networks or equipment functional to the delivery of public services, or entities that provide public services, whose1icenses or service contracts provide for the retrocession of investments to the purchasing institutions as they mature, or in advance. The financial intervention in favor of the licensee referred to in paragraph 2, article 19, Law no. 109 of 11 February 1994 is comprised therein;

i) the interventions contained in the general implementation and execution programs related to urban planning declared a primary regional interest with a public purpose to recover and to promote the area.”

“Implicit in the purchase of the collar is the purchase of a cap and the simultaneous sale of a floor, which is permitted solely for the purpose of financing the protection against rising interest rates provided by the purchase of the cap.”

“… The rules of this paragraph are core principles for the coordination of public finance mentioned in articles 117, third paragraph and 119, second paragraph, of the Constitution. Debt management transactions that use derivatives, performed by regions and entities referred to in the consolidated act referred to in Legislative Decree no 267of 18 August 2000, must be aimed at the reduction of the final cost of debt and at reducing exposure to market risks. Entities may enter into such transactions only on corresponding due liabilities, having regard to the hedging of the undertaken credit risks”.

“1) … Following the legislative amendments that occurred on derivative instruments and on the definition of indebtedness, and also in light of the evolution of local authorities' resorting to the derivatives market, there is the need to clarify some interpretative aspects regarding the use of delegations of payment disciplined by Article 206 of the Local Authorities' Consolidated Act (TUEL) – Legislative Decree of 18 August 2000, no. 267.

It seems appropriate to remind that the explanatory Circular of the MEF Decree 389/2003 already included a general consideration such that no derivative is classifiable as a liability.

Therefore, derivatives are identified, according to the rules mentioned above, as "debt management instruments and not as indebtedness".

2) Article 3, paragraph 17, Law of 24 December 2003, n.350, amended by Article 1, paragraph 739, Law of 27 December 2006, no. 296 – Definition of indebtedness

“Article 119, sixth paragraph, of the Constitution indicates that "Municipalities, Provinces, metropolitan cities and Regions […]. May have recourse to indebtedness only to fund investment expenses. […]". In the implementation of this constitutional principle, the 2004 Financial Law (Law 350/2003) gave a precise and detailed definition of the concept of indebtedness, indicating the types of transactions to be considered as such in reference to the abovementioned constitutional law….

In conclusion, the definition of swap as mere instrument of debt "management" is further confirmed by the fact that derivative instruments are not mentioned in any of the abovementioned provisions of law; therefore, in light of the above, derivative instruments do not qualify as indebtedness transactions."

“From 1 January 2007 within the public finance coordination framework, mentioned in article 119 of the Constitution, the contracts with which the regions and entities, referred to in the consolidated act referred to in Legislative Decree no. 267 of 18 August 2000, set up debt sinking transactions with single payment at maturity, and derivative transactions, must be transmitted, by the contracting authorities, to the Ministry of Economy and Finance – Treasury Department. This transmission, which must occur before the signing of the contracts themselves, is a constitutive element of the effectiveness of the same. The provisions of the decree referred to in paragraph 1 of this article, relating to monitoring, remain valid.”

Article 62(6) (as later amended) stated that the local authorities "are prohibited from entering into … contracts relating to derivative financial instruments” until new regulations to be made by the MEF came into force, and in any case for a minimum period. However, “there still remains the possibility of restructuring the derivative contract following change in the liability to which the same derivative contract refers, in order to maintain the correspondence between the renegotiated liability and the related hedging transaction”.

Article 62(9) amended Article 3.17 of the 2004 Finance Law with effect from 1 January 2009 so as to provide that indebtedness included “on the basis of the criteria defined at European level by the Statistical Officer of the European Communities (EUROSTAT), any premium received at the entry into derivative transactions”. By way of further explanation, a premium – sometimes referred to as an “upfront” – is a payment made by the bank at the time of transacting (I address the issue of whether such a payment had to be made to the bank’s counterparty at [261] below). A bank who paid an upfront would transact on more advantageous terms (for the bank) than one who did not, those improved terms being provided as the quid pro quo for the payment.

"3. Without prejudice to the provisions of the following paragraphs, the institutions referred to in paragraph 2 are prohibited from:

a) entering into contracts relating to derivative financial instruments provided for by article 1, paragraph 3, of the Consolidated Financial Law, as per Legislative Decree no. 58 of 24 February 1998;

b) renegotiating derivative contracts already in place at the date of entry into force of this provision;

c) entering into financing contracts that include derivative components.”

After an initial liberalisation of the ability of local authorities to enter into derivative transactions, there has been a progressive tightening of the position, culminating in the general prohibition (with limited exceptions) effected by the 2013 Finance Law.

Many of the provisions – particularly those which appear in primary legislation – appear in broadly drafted language, which has been “fleshed out” over time.

The purpose of Article 41 of the 2002 Finance Law was “to indicate the purpose for which the Ministry acts” but “the Article, itself, does not specify or limit the type of derivatives which may be approved, nor indicate that they must successfully contain the debt if they are to be valid” ([72]).

While it was not clear what the phrase “containment of the costs of the debt" in Article 41 covered, it was not possible to read "containment" as meaning that, at the date of the swap contract, its predicted effect on the expiry of the bond to which it related was that the cost of the debt to Piedmont would be no more than the coupon on the bond (i.e. that there was no negative mark-to-market).

“The valuation of a floor or a cap is no exact science; and depends on a number of assumptions and/or complex mathematical formulae or models, of which there are several, predicting what may be a long term future. If the validity of a derivative with a floor and a cap depends on an alignment of cap and floor values current at the date of the agreement – a question affording wide scope for argument - the result would appear unworkable.”

Article 119 was a provision “of a high order of generality” ([144]), and the concept of “indebtedness” was exhaustively defined by the list in Article 3 of Law 350/2003 ([144]). That list did not include derivatives and did not extend to the transactions in issue.

The change in the scope of Article 3 which took effect from 1 January 2009 was not merely clarificatory of the position before that date ([156]).

Article 41(2) of the 2002 Finance Law imposed a financial advantage requirement which applied to derivatives where there was a debt refinancing transaction which involved new debt. For this purpose, it was necessary to consider the effective cost of the refinanced debt taking into account the effect of any derivative which formed an integral part of a debt refinancing transaction. The requirement did not involve examination of a derivative transaction in isolation: the overall benefit of the whole debt refinancing transaction is what mattered for the purposes of Article 41.2. Although he said he did not need to decide the point, the Judge also said that he favoured Dexia’s case that there was a fourth qualification to the application of Article 41(2) to derivatives, namely that the requirement does not involve taking account of either the initial MTM or the so-called “implicit costs” of the derivative, since they are not actual costs.

Article 3 of Decree 389, as interpreted with the benefit of the 2004 MEF Circular, was not contravened because it imposed no requirement that, when a local authority purchased a collar, the MTM of the floor at inception had to be equal to the MTM of the cap at inception ([190]) and there was no contravention of Article 3.2(f) because an analysis of cashflows did not show “an increasing profile of the present values of single payment flows.”

The statement in the 2004 MEF Circular that:

“In the event of a variation in the underlying debt of a derivative instrument, for example because the debt has been renegotiated or converted, or because it has reached an amount inferior to what was initially foreseen, the position in the derivative instrument can be readapted on the basis of conditions that do not determine a loss for the agency”;

went “well beyond what is said in article 3.3” ([199]) and had not been the subject of Italian law evidence ([200]).

There was no general prohibition on local authorities entering into speculative transactions under Italian law ([203]).

“The Court of Appeal of Bologna is, of course, not the highest Italian court with jurisdiction in administrative law matters. The task for the judge was to predict how the highest court would determine the matter if it came before it. In our judgment, the judge was plainly entitled to prefer the evidence of Professor Napalitano and conclude that the highest court would not follow the reasoning in Municipality of C. Neither expert supported its essential reasoning, which is indeed extremely vague, difficult to follow and devoid of any analysis of paragraph 17 or the 2009 amendment. Moreover, the 2009 amendment, to include premiums on derivatives, is striking. If swap transactions were a form of indebtedness already covered by paragraph 17, it is impossible to see why the amendment was a rational one to make.”

As noted below, in 2020 the highest court on civil matters, the Supreme Court, upheld the decision of the Court of Appeal of Bologna.

The judge was entitled to accept Professor Napolitano’s evidence as to the legislative purpose of Article 41.2 ([97]) and as to the requirement of “new debt” for Article 41.2 to apply ([99]), supported as this latter conclusion was by the Court of Appeal of Milan in the Arosio case.

Even if Article 41.2 had applied to the swap in question, the judge was right in his (obiter) conclusion that a negative initial MTM was not to be taken into account when calculating financial advantage ([117]).

To the extent that the judgment determines issues of English law (and I include within that description issues as to the characterisation for English conflicts of law purposes of certain issues raised by reference to Italian law), the decision is not strictly binding on me. However, as Lord Neuberger observed in Witters v Joyce (No 2) [2016] UKSC 44, [9]:

"So far as the High Court is concerned, puisne judges are not technically bound by decisions of their peers, but they should generally follow a decision of a court of coordinate jurisdiction unless there is a powerful reason for not doing so."

To the extent that the judgment makes findings of fact on Italian law, the effect of s.4(2) of the Civil Evidence Act 1972 is that the judgment could have been rendered admissible in evidence for the purpose of proving the content of that law, in which case “the law of that country, territory or part with respect to that matter shall be taken to be in accordance with that finding or decision unless the contrary is proved”. However, it is necessary for a party seeking to rely on s.4(2) to serve a notice of an intention to rely on the other judgment for this purpose. No such notice has been served, with the result that the findings as to the content of Italian law in Busto have no evidential status.

However, Mr Dhillon KC adopted the reasoning which had led Cockerill J to reach her conclusions as part of his case.

Article 1322 provides that “(1) the parties can freely determine the content of the contract within the limits imposed by the law; (2) the parties can also enter into contracts of a type that do not have a specific regulation, provided that they are directed to the realisation of interests worthy of protection according to the legal system” (the requirement that the contract be directed to the realisation of interests worthy of protection being referred to as a requirement that the contract have a lawful cause or causa).

Article 1325 provides that two essential elements of a contract are “the function” or causa and the “object” or oggetto.

Article 1346 provides that “the object of a contract must be possible, lawful, determined or determinable”.

“the reconstruction according to which derivative contracts are a ‘rational risk’, causally valid only if, at the time of entering into it, the contract identifies the risk borne by the parties by means of certain indicators: the current market value (mark to market); the possible future scenarios of performance of the contract, with an estimate of the related probabilities; the costs, normally implicit, incurred by the client, from the contract. By refusing to protect ‘a transaction characterised by risks unknown to one of the contracting parties and outside the scope of the agreement’, the approach has in fact ‘the characteristic of automatically entailing the complete nullity of most, if not all, of the derivatives in circulation which have been concluded without an agreement on the quantative and qualitative extent of the risks”.

The swap transactions required the approval of the city council under Article 42 of TUEL, and in the absence of such approval were void.

There had been a breach of Article 119(6) of the Italian Constitution because the swap transactions represented indebtedness (actual or potential) and the Municipality had not undertaken this indebtedness
for the purpose of financing investment expenditure.

This was so for both the two transactions which included an upfront element and the third which did not, it not being significant so far as the former was concerned that the 2008 Decree which had stipulated that swap transactions involving an upfront payment were a form of indebtedness for the purpose of Article 119(6) of the Italian Constitution had only been passed and come into effect after the swaps had been entered into.

Moving from the law regulating the actions of public authorities to the law of contract generally, the swaps did not comply with Article 1346 of the ICC because the swap contracts did not contain a specific reference to the underlying loans nor an MTM valuation and therefore lacked the essential element of a worthy causa (adopting the “rational bet” analysis).

All three swaps constituted indebtedness because of their uncertain nature and violated Article 119(6) of the Italian Constitution because they had not been undertaken “to finance investment expenses”.

The decision to enter into the swaps could only be taken by the city council, by reason of Article 42 of TUEL.

The upfront payments had not been specifically allocated to investment expenditure at the point of contracting, as required.

The swaps lacked essential elements of an enforceable contract in the form of a worthy causa and/or an oggetto in failing to identify the underlying loan contracts in connection with which it was said that the swaps had been taken out.

The swaps lacked essential elements of an enforceable contract in the form of a worthy causa and/or an oggetto in failing to state the current MTM at the time of contracting.

“may be of particular importance, in the framework of Article 374 of the Code of Civil Procedure, paragraph 2: in addition to being of great importance, on a practical level, for the concrete effects that the solutions to be adopted may have in the framework of the litigations between financial intermediaries and local authorities on derivatives (litigations often involving large monetary flows), they relate to issues on which the Court of Auditors, in its various administrative and jurisdictional forms, and the Council of State have provided conflicting responses. The importance of the issues to be dealt with derive, therefore, from the framework of serious uncertainty that is
handed over by the various bodies that have dealt with them during the administration of control, judicial verification of accounting liability and judicial examination of the legitimacy of the exercise of the local authority's self-redress power.

The Panel, although obviously aware that in the dispute brought to its examination there are legal positions, not involved in the assessments made by the Court of Auditors and the Council of State, believes that the need to avoid, for the future, that the rulings made by the first section of the Supreme Court mark fluctuations on an issue, which is of fundamental importance for the interests of local authorities and banking and financial intermediaries, considering that this issue is already marked by the aforementioned disagreements. It is therefore considered appropriate to refer the case to the First Chairman, for the eventual assignment to the Joint Sections.”

“According to the traditional doctrine, judicial decisions are not a source of law. One way to put the proposition is to state that judicial decisions are not binding precedents in subsequent cases; another is to say that decisions of courts affect only the parties and have no effects erga omnes. However the matter is put, it is obvious that the traditional Italian view of precedent is an organic part of the traditional view of the legal process, with its emphasis on legislative supremacy and a sharp separation of powers. The judicial function is limited to the interpretation and application of the law. If a decision of a court is a precedent or is otherwise effective beyond the limits of the case, it is engaging in a function reserved to the legislator.

This theory of the limits of the judicial process, like other aspects of the folklore of judicial interpretation, is in conflict with the facts in Italy ....

There are other factors...that call the validity of the folklore into question. The Supreme Court of Cassation is the highest court of judicial, as distinguished from administrative and constitutional, jurisdiction. It is at the apex of that part of the Italian judiciary most like common law courts in function. Article 65 of the 1941 Law on the Judiciary places the obligation of assuring the “uniform interpretation of statutes” and the “unity of national law” on the Supreme Court of Cassation. At an earlier time there were five such courts, all on the same level of authority, and considerable disparity existed among their interpretations. A principal argument for a single such court was the desire for an authoritative final voice on the interpretation of the law, and the statute expressly confers that function on the Supreme Court of Cassation. Even though the decisions of that court are not “binding” in theory, few judges would knowingly adopt a different interpretation. They may not be bound, but the pressure to conform is irresistible.”

“The substantive part of the Supreme Court Judgment (under the heading Reasons for the Decision) consists of 10 sections. These provide in summary as follows:

i) Section 1 sets out the five grounds of appeal against the Court of Appeal judgment relied upon by the bank;

ii) Section 2 sets out the ground of the Municipality's conditional cross-appeal. That has no relevance to the issues in this action;

iii) Section 3 refers to the Interlocutory Order and the issues raised by it;

iv) Section 4 contains an analysis of the ‘topic of derivatives’, with a particular focus on the interest rate swap (IRS). The section of the judgment also describes certain market concepts, most significantly mark to market;

v) Section 5 of the judgment considers the function/purpose of a swap;

vi) Section 6 of the judgment addresses ‘the validity of the contractual instrument that contains’ the swap;

vii) Section 7 of the judgment begins:

‘After these necessary preliminary clarifications, we can proceed with examining the issue (which is the basis of the questions posed by the division that referred the matter to these Joint Divisions) relating to the execution of derivatives, swaps and IRSs by public entities in general and local entities in particular’

Section 7 of the judgment then goes on to address the constitutional and statutory framework that governs the entry into derivative contracts by Italian local authorities, explaining how that statutory framework has changed over time;

viii) Section 8 of the judgment begins by stating:

‘The Court notes that the aforementioned changes in the law, while turbulent and not always linear, make it possible to conclude that, even during the period that Article 41 of the 2002 Budget Law was in effect and, thus, until 2008 (the year the legislature imposed more stringent limits on entities' ability to enter into derivatives) the contractual power of local entities had clear limitations’;

ix) What is being addressed at Section 9 of the Supreme Court's judgment is highly controversial between the parties and is a specific topic of expert evidence. It begins as follows (at paragraph 9):

‘However, that does not fully solve the problem brought to the attention of these Joint Divisions, since we must – within the ambit of the path theoretically admissible – determine whether other limits exist on the lawfulness of those contractual types for the Public Administration’.

[I would note that Cockerill J went onto hold that Section 9 was concerned with the general requirements of the Italian law of contract so far as derivative transactions are concerned, and in particular with the essential elements of an Italian law contract of oggetto and causa and there has been no challenge to that conclusion in these proceedings].

x) Section 10 of the judgment addresses the two remaining grounds of appeal. This section of the judgment is introduced by the court stating (at paragraph 10):

‘However, that does not fully solve the problem brought to the attention of these Joint Divisions, because of the remaining grounds (1 and 2) of the appeal, which involve the problem of the indebtedness of public entities and the authority to decide in relation to the same’".

Does Section 8 of Cattolica hold that Italian local authorities lack capacity to enter into speculative derivative transactions, and, if so, was that decision correct as a matter of Italian law?

Did Sections 8 and/or 10 of Cattolica hold that swaps were a form of indebtedness (whether for the purposes of Article 119 of the Italian Constitution or otherwise) and that local authorities did not have capacity to enter into them other than for the purpose of financing expenditure?

Did Section 10 of Cattolica hold that all swap agreements, or only certain kinds of swap agreement, required approval by the City Council (and, if the latter, which kinds)? It is accepted that Section 10 of Cattolica held that at least certain kinds of swap required approval at City Council level.

In the extent to which Cattolica held that swap agreements required approval by the City Council, was that decision correct as a matter of Italian law?

One of the regions, Calabria, appears to have argued that Article 119(6) gave local authorities the constitutional right to borrow for investment purposes, and that the temporary prohibition on entering into IRS transactions would unlawfully restrict that right. It is not clear to me whether that argument was advanced on the basis that an IRS was itself a permitted form of indebtedness, or a necessary adjunct to permitted forms of indebtedness (e.g., to the taking out of long term loans at floating rates of interest).

In response, the President of the Council of Ministers argued that the temporary prohibition was necessary to address an economic and financial crisis "largely caused also by the indiscriminate use of derivative financial instruments that have led to significant debt for public bodies" and that “the complaint of breach of Article 119 of the Constitution is also unfounded, ‘it being clear that the provision criticised does not prohibit the use of debt for investment expenses, whatever the financial instrument used’".

The Constitutional Court noted of derivative transactions that “on a functional level, as is well known, the transactions in question, in addition to having a hedging purpose, can also perform a speculative function, affecting the same causal structure of the contract, with consequent risks of insolvency linked to various factors connected above all to the overall performance of the market”. It held that the temporary ban was necessary “to prevent, through the conclusion of highly random contracts, the finances of the institutions themselves from being subject to debt exposures that are very onerous”.

The Constitutional Court held that the 2008 Decree was not inconsistent with Article 119(6), the Court noting that “the last paragraph of Article 119 of the Constitution places a financial equilibrium constraint that is substantiated in allowing local authorities to resort to debt only to finance investment expenses”, and that it was open to the state by legislation to define what constitutes indebtedness and investment, including by determining on a temporary basis that IRS transactions “cannot be classified as investment activity” and “to prohibit, among other things on an interim basis, the use of these types of transaction that are objectively dangerous for the equilibrium of regional and local finance”.

It is that finding which Mr Cox KC invites me to interpret as the court determining that all IRS transactions are a form of indebtedness for Article 119(6) purposes, with the state using the legislative power permitted to it by Article 119 to provide through the 2008 Decree that such transactions could not (for an temporary period at least) constitute debt incurred for investment purposes.

However, it is unclear to me whether the Constitutional Court was intending to go that far, or simply answering Calabria’s argument that the 2008 Decree unlawfully limited its Article 119(6) right to incur debt for investment purposes through the conclusion of IRS transactions with the repost “it is for the state through legislation to define what constitutes an investment, and they said that these transactions do not serve that purpose”.

In any event, as the state had the legislative power to define both what constituted indebtedness and what constituted investment for Article 119(6) purposes, the 2008 Decree is essentially self-defining – the prohibition or limitation it imposes will by definition establish the scope of Article 119(6) with effect from the date the 2008 Decree came into force. That makes it unlikely that the Constitutional Court was intending to determine on an a priori basis that independently and in advance of the 2008 Decree, all IRS transactions constituted a form of indebtedness for Article 119(6) purposes.

[10.1.3] held specifically in relation to IRS transactions involving an upfront that they constituted recourse to indebtedness:

“Amounts received as an upfront constitute indebtedness for purposes of public accounting law and Article 119 of the Italian Constitution”.

That conclusion in relation to a specific type of IRS transaction would be superfluous if the Supreme Court, in Section 8, had already held that all IRS transactions constituted recourse to indebtedness.

More significantly, [10.1.4] expressly rejects the argument that all other IRS transactions also constitute recourse to indebtedness, suggesting that answering this question requires a consideration of each swap transaction “as a whole”.

Article 119(4) provided that “revenues deriving from the above mentioned sources shall enable Municipalities, Provinces, Metropolitan Cities and Regions to fully finance the public functions assigned to them”, a provision which the Supreme Court held imposed the “constraint of financial balance”.

As will already be clear, Article 119(6) provided that local authorities “may have recourse to indebtedness only for the purpose of financing investment expenditures”.

The Supreme Court held that the “aleatory” nature of derivative contracts (as the difference between the amounts to be paid and received by a local authority under an IRS is uncertain, and exposed to market risk) was not compatible with “the fixed nature of expenditure commitments” (and presumably, therefore, prima facie inconsistent with the need to balance income and expenditure as envisaged by Article 119(4)).

The Supreme Court’s reference to Article 119(6) in this context is less clear. The Supreme Court had yet to address the issue of whether entering into an IRS constitutes the assumption of indebtedness, and in due course it concluded that not all IRS transactions constituted indebtedness ([10.1.4]). However, the Supreme Court may have had in mind that the matching of borrowing to (investment) expenditure in Article 119(6) was a further example of the “constraint of financial balance”.

That would prima facie lead to the conclusion that local authorities could not enter into any derivative transactions, because they are all aleatory. However, that conclusion cannot be reconciled with the specific legislative provisions the Supreme Court had reviewed at [7.1.1], [7.1.3], [7.1.5] and [7.1.6] which permitted local authorities to enter into derivative transactions in certain circumstances. The Supreme Court reconciled those provisions by treating them as specific permissions operating as exceptions from a general prohibition on local authorities entering into derivative transactions ([8.2]: “we must conclude that the law provisions examined above … only allowed what, normally, would be prohibited, with the result that those provisions were, above all, exceptional and had to be narrowly interpreted”).

A public authority had contractual capacity to conclude derivative contracts until the 2013 Finance Law came into effect ([147]).

However, only in the case of a hedging (and not a speculative) derivative “could be a local authority be said to have capacity to enter into them”.

It is to be noted that it is only in [8.3] of the Supreme Court decision in Cattolica that (two) express references to capacity are to be found.

The Supreme Court’s summary of the statutory framework referred to various enactments making it “possible” for local authorities to enter into particular derivative transactions (e.g. [7.1.1]), or giving them “authority” to do so ([7.1.3]), or which “precluded” local authorities from entering into such transactions ([7.3]).

The various statutory restrictions were described in [8] as “limits of entities’ ability to enter into derivatives” and the Supreme Court introduced the discussion of speculative derivatives which followed as showing that “the contractual power of local entities had clear limitations”.

While the language of “prohibition” can be found in [8.1] and [8.2] in relation to speculative derivatives, that was linked to Articles 119(4) and (6) of the Constitution. As I explain at [270]-[271] below, I am satisfied that Article 119(6) is a limit on the substantive power of a local authority, and while the Supreme Court may not have been directly applying Article 119(6) at this stage of its judgment, the significant reliance placed on Article 119(6) suggests that the Supreme Court was dealing with a limitation on local authorities’ powers of the same kind.

When addressing the civil law restrictions relating to oggetto and causa in Section 9, the Supreme Court referred back to its Section 8 distinction between speculative and hedging derivatives in language which distinguished between the ability of local authorities to enter into hedging derivatives, and their ability to “usefully and effectively do so”:

“In regard to derivative contracts entered into by Italian Municipalities based on the laws in effect until 2014 … and the distinction between hedging and speculative derivatives based on the criterion of the different degree of risk of each of them, although local authorities could enter into the former with qualified financial intermediaries, local entities could usefully and effectively do so only if the contractual object … could be precisely measured/determined”.

That passage appears to be drawing a distinction between the power to contract at all (in relation to the speculative/hedging distinction, with local authorities having power to enter into derivatives of the latter kind but not the former), and the enforceability of the transaction where there was such a power (having regard to the requirement for a legitimate oggetto).

As a matter of Italian law (Article 11 of the ICC and Article 1(1 bis) of the Law of Administrative Procedure), a local authority has the same capacity to contract as other legal and natural persons, save to the extent that its capacity is expressly restricted by law.

There is no legislation which removes the contractual power of Italian local authorities to enter into speculative derivative contracts.

The Supreme Court was in error in purporting to derive a limitation on the contracting power of local authorities so far as speculative derivatives are concerned from the Constitutional Court Decision No 52/2010.

Article 119(6) of the Italian Constitution does not limit the capacity of a local authority, but renders any transaction which does not comply with that provision void.

The provisions of the 2008 Decree and the 2013 Finance Law did not themselves limit the contractual capacity of local authorities, because they allowed the local authority (but not its counterparty) to enforce such a transaction.

I have noted that the Supreme Court’s decision involved reading much into Constitutional Court judgment No 52/2010. However, for the reasons I have set out at [194] above, I accept that there are aspects of that decision which can be read as providing support for the Supreme Court’s analysis, and I am not persuaded that the Supreme Court’s interpretation is untenable, nor does its analysis rest entirely on its reading of Decision No 52/2010 in any event.

While I accept Professor Torchia’s evidence that, as a matter of Italian law, a limitation on the substantive power of a local authority to enter into a contract of a particular type must be found in legislation, the Supreme Court purported to found that limitation in its interpretation of Articles 119(4) and (6), and the limitations of the “enabling” legislation it summarised in Section 7 of the judgment.

The Supreme Court’s interpretation does not appear to have involved the direct application of those provisions, or a process of textual interpretation in a conventional sense, but reliance on those provisions to identify a principle which the Supreme Court then applied. It was, undoubtedly, the Supreme Court itself, rather than the language of the legislative enactments, which did the “heavy lifting” in formulating this restriction. Indeed, Italian academics have noted that the contribution of case law on the issue of local authority swap transactions “is to be appreciated on an objective level, as a particularly ‘creative’ and decisive intervention in the development of the matter” (AA Dolmetta cited in Mario Anolli and Andrea Perrone, “Italian Case Law on Derivative Contracts: An Interdisciplinary Analysis”(2020) III(II) Revista di Diritto Bancario 195). The Berti Article, 37 described the Supreme Court as “drawing from the system, in an interpretative way, the guiding principle that directs the administrative action” (which reflects the fact that, as Mr Dhillon KC submitted, there was no conventional process of ascertaining and directly applying the text of the relevant enactments).

However, applying the deference to which a decision of the Joint Divisions of the most senior civil court in Italy is entitled (see [125] above), I do not feel able to conclude that the decision was not open to the Supreme Court as a matter of Italian law or that it does not represent Italian law as matters stand.

Further, there have been four subsequent decisions of the Italian Supreme Court which have applied Cattolica (Decisions Nos 2157/2021, 21830/2021, 24014/2021 and 8603/2022). While these decisions were all concerned with that part of the Cattolica decision concerned with Articles 1322, 1325 and 1346 of the ICC (and hence oggetto and causa), those were, if anything, even more controversial elements of the Cattolica decision, and there are some similarities between aspects of the reasoning in Section 9 of Cattolica and that in Section 8. There is nothing to suggest that the Italian Courts are experiencing any “buyer’s remorse” at the very significant changes in Italian law effected by Cattolica so far as IRS transactions are concerned.

The heart of the Banks’ submissions on this issue (to quote from paragraph 168 of their opening) is that there is a “fundamental distinction between a prohibition which renders an act unlawful such that the law provides for a specific consequence (e.g. providing that the resulting act shall be void) ... and a restriction placed on the power of an entity to do an act”, with Article 119(6) being a provision of the former kind.

However, and with respect, that distinction of such central importance to English lawyers proved rather more elusive in the Italian legal materials.

Thus, when identifying exceptions to the general capacity of public bodies to undertake private law acts such as entering into contracts, Professor Torchia, Professor Gentili and the underlying materials generally defined the exception to general capacity as something which would arise from a “prohibition”. Thus, Professor Torchia in her first report stated that “public bodies have a general capacity to acquire legal rights and obligations, unless there is an express prohibition by law” ([14.2]) and referred to “the general capacity of public authorities to enter any kind of contract – unless there is an explicit prohibition set by law” ([14.4]). Professor Gentili in his report also referred to the general capacity of public authorities unless “there is an explicit prohibition set by law” ([5.75]).

I was referred to Supreme Court Decision No 11656 of 12 May 2008 which stated “both public legal entities and private legal entities have the same capacity, so that the public administration can enter private law contracts if there is not a specific prohibition” (emphasis added). Further, Council of State Decision No 1156/2010 referred to the capacity of a public administration to enter into contracts only existing when “exercised in accordance with the procedures defined by the legislature and, in the species, by the express will of the legislature” ([6.7.1] and to “lack of capacity of the public [authority]” depending on “the violation of rules dictated in the public interest concerning, ultimately, the economic public order”. While that statement was made in the context of a failure to comply with public tender rules it is equally (or even more) apposite as a means of referring to a failure to comply with Article 119(6) of the Constitution.

While the 2013 Finance Law permitted public authorities to enforce prohibited swaps, the effect of contravention of Article 119(6) of the Constitution prior to that date was the transactions were void and unenforceable for both parties.

evidence of Italian law (both from the experts and from Italian case law);

reference (on Venice’s part) to English case law addressing this topic under other legal systems; and

evidence from the two market practitioners as to their understanding.

the transaction is explicitly carried out to reduce the risks connected with the underlying instrument;

there is a “high correlation” between the technical and financial
characteristics of the underlying instrument (i.e., maturity, interest rate, etc.) and those of the derivative transaction; and

there are procedures and internal controls within the intermediary which are sufficient to make sure that the above conditions are satisfied.

Article 28.3 (the obligation of authorised intermediaries to inform investors as soon as derivative instruments entered into “for purposes other than hedging” have generated a particular level of actual or potential loss).

Article 37.1(d) (a management contract had to indicate whether derivative financial instruments could be used for purposes other than hedging the risks associated with the positions held under management).

Article 43.5 (permitting authorised intermediaries to carry out derivative financial instruments only when certain conditions were met, including, in the case of options, derivatives and short sales, that they were traded on regulated markets “unless the contracts are concluded for the purpose of hedging the risks associated with positions held under management”).

The CONSOB Determination was not, therefore, formulated with the specific considerations regulating local authority finance in mind, but by reference to the services being provided by financial intermediaries or asset managers. Nor did it engage with more nuanced questions such as the status of a swap which (in part at least) is entered into for hedging purposes, but the parameters of which are structured for the purpose of eliminating an exposure such as a negative MTM on an existing transaction which the contracting party wishes to close out. Finally, there are many Italian court decisions which have addressed the issue of whether a derivative was hedging or speculative in nature without referring to the CONSOB Determination or applying the three-stage test (for example those referred to in Professor Alibrandi’s third report, [12]).

Any hedge will necessarily involve a risk that the actual rate may move in such a way that the protection buyer will be worse off than if they had not brought the protection, as well as being better off. A vanilla IRS in which the protection buyer who has a variable interest rate exposure purchases an IRS to hedge that exposure by agreeing to pay a fixed rate to a bank in return for receiving interest at the variable rate runs the risk that the fixed rate paid will exceed the variable rate received.

It was no doubt for that reason that the Supreme Court in Cattolica was at pains to point out that both hedging and speculative derivatives involved the assumption of risk by a local authority, albeit (in the Supreme Court’s determination) different degrees of risk: [8.2], [8.3] and [9.8].

A number of these decisions found (not surprisingly) that a derivative contract entered into when there was no underlying risk to hedge was speculative (see Court of Turin, 21 October 2021 Decision No 4685, Court of Florence, 5 June 2012 and Court of Lucera, 26 April 2021).

A significant discrepancy between the notional amount, maturity date, exchanged interest rate or cash flows of the derivative and the underlying risk has also been relied upon to support the conclusion that a derivative was speculative: e.g. the Court of Cassation Decision No. 19013/2017, the Court of Rome, 8 January 2016, Decision No. 212, the Court of Novara, 24 July 2012, Decision No. 569, and the Court of Turin, 21 October 2021, Decision No. 4685. Those cases reflect the second stage of the test propounded in the CONSOB Determination of the need for a “high correlation” between the technical and financial characteristics of the underlying instrument and those of the derivative transaction.

A decision of the Court of Auditors of the Lazio Region of 12 April 2022 (No 42), which was added to the trial bundle after the expert witnesses had given evidence, held a swap to be speculative where the local authority, whose own borrowings were on a fixed rate basis for 86.5% of its underlying debt, agreed to receive a fixed rate from the bank in return for paying the bank interest in two tranches calculated by reference to two structured variable rates. The Court of Auditors held that this could not be a hedge because there was “no risk to be hedged” (because the vast majority of the authority’s borrowing was at a fixed rate), but was “a mere financial speculation, at high risk of loses” (the authority hoping that market movements would be such that the interest payable to the bank would be less than the fixed rate being received). Venice also relied on another decision added to the trial bundle after the expert evidence (a decision of the Court of Venice No 696/2022) to similar effect so far as the 2005 swap in that case is concerned.

A decision of the Court of Appeal of Milan in Decision No 2393/2020 involved a “collar” swap in which the MTM of the cap at the date of the swap was much lower than the MTM of the floor. The Court of Appeal held that this was a speculative derivative. In reaching that conclusion, the Court of Appeal relied on Article 3, paragraph 2(d) of Ministerial Decree 389/2003 (see [136]) and the 2004 MEF Circular ([140]), stating that it permitted a local authority to purchase a collar, not to sell one, and it was held that if the MTM of the floor in favour of the bank was significantly greater than the MTM of the cap, it was the local authority which was purporting to “sell” a protection which was an inherently speculative transaction. The Court of Appeal concluded:

“An invalidity that - due to its speculative characteristics - must therefore affect the entire contract, and not only the part that concerned the imbalance between the MTM of the cap option and the MTM of the floor option, as also argued in the alternative by the appellant and, in the opinion of this Court, without foundation.”

A (pre-Cattolica) decision of the Court of Orvieto of 12 April 2012, applying a “prima facie likelihood of success” (fumus boni iuris) test in the context of an application for an injunction, found the derivative contract in that case prima facie speculative because the terms of the contract had been structured to absorb the negative MTM on prior swap transactions. The Court observed:

“The reason that drives the said authority to renegotiate the derivative contract is to stop excessive and out-of-control losses arising out of the accrual of negative differentials. As a consequence, the derivative contract as renegotiated appears to be less and less connected to its original reason (the hedging of a material risk), getting dangerously close to purposes that can properly defined as speculative … Local authorities are only allowed to underwrite derivative investments with hedging purposes (Article 3 of Ministerial Decree No 389/2003 and Article 41 of law No 448/2001)”.

The Court of Turin of 21 October 2021 in Decision No 4685/2021 was a non-local authority case in which the intermediary had suggested to its client that a proposed swap transaction was a hedge. The “hedge” in question replaced a previous swap transaction with a negative MTM, which was rolled into the new structure. In considering whether the new swap was a hedge, the Court considered and applied the CONSOB Determination. With specified reference to the negative MTM rolled over from the previous swap, the Court noted

“Renegotiation can procrastinate the matured loss over time, dilute it (if e.g. the duration of the contract is extended compared to the original swap) and, to the limit, makes the exposure in client derivatives assume a highly speculative connotation, regardless of the coverage function of the first contract, to the extent the contract is renegotiated, to resorb the accrued loss, contains features (notional, duration and parameters) without ‘high correlation’ to existing exposure”.

By contrast, the Supreme Court in Decision No 21830/2021 held that a vanilla IRS swap transaction (the purchaser paying a fixed interest rate in an amount aligned with its underlying borrowing in return for receiving a floating rate on the same amount) was a hedge, and not a speculative transaction. In addition to the close alignment of the IRS with the terms of the underlying borrowing (cf, the second element of the CONSOB Determination), the court noted the “alignment between the financial parameters included in the derivative contract and the forecasts of the trend of interest rates for future years covered by the IRS (so-called forward rate curve)”. I would note that if the terms of the derivative have been structured not simply to reflect current expectations of the potential for future interest rate movements, but “off market” in an effort to cover the cost involved in covering a negative MTM on a transaction which is to be closed out, that “alignment” will necessarily be absent.

“the case on the dividing line between hedging and speculation is in this case one of Italian Law. It is impermissible for me to impose English Law concepts of hedging as it would be to impose an English Law understanding of the capacity/validity divide”.

“Instruments that reduce, as well as instruments that eliminate, exposure to risks from borrowing liabilities. The defining characteristic of hedging is that it eliminates or reduces an exposure to some market risk or risks: see the definition of ‘hedging’ published by ISDA, ‘A trading strategy which is designed to reduce or mitigate risk. As I understand what constitutes ‘hedging’, Vestia would properly be said to have ‘hedged’ a risk of loss if they entered into a transaction that reduced or limited it, either in the sense of limiting the amount of the overall loss that Vestia potentially face from market movement (or in other circumstances) or in that the hedge would protect them from loss only in particular circumstances.”

In respect of certain transactions, the Judge concluded that they were speculative as a whole even though they included elements which would operate as a hedge in certain circumstances.

hedging involved reducing existing exposures to a particular risk, whereas speculation involved the assumption of a new risk for the purpose of financial gain independently of any other risk;

hedging involved protection against future adverse price movements, and the use of derivative instruments to raise money to offset the effect of existing high prices was necessarily speculative; and

the derivatives in question gave the purchaser a small return unless the market collapsed, in which case it would suffer catastrophic losses, and were therefore speculative because they involved the purchaser “acting as insurer, not as insured”.

Venice wanted to restructure the Rialto Bond (in particular by lengthening the repayment date by 15 years) in order to realise savings and “free-up” its budget, and also to obtain protection through an IRS against the risk of a significant increase in interest rates over the extended duration of the Rialto Bond.

The Bear Stearns IRS reflected the original tenor of the Rialto Bond, and by the end of 2007, the Bear Stearns IRS had a significant negative MTM so far as Venice was concerned of €7.5m. Bear Stearns was also entitled to additional fees and costs as the price of unwinding the Bear Stearns IRS.

Any restructuring of Venice’s IRS protection to reflect its desire to extend the repayment date of the Rialto Bond required Venice to address the Bear Stearns IRS and the negative MTM on it. That could have been done (i) by making a payment to Bear Stearns to unwind the Bear Stearns IRS and entering into a new and independent transaction with Bear Stearns or someone else; (ii) re-negotiating the duration of the Bear Stearns IRS on a basis which rolled over the negative MTM or embedded it in an adjustment of the terms of the new swap; or (iii) entering into an IRS with another bank or banks who would themselves make the payment necessary to close out the Bear Stearns IRS, and recover the cost of doing so through the terms of the new swap.

As I have explained at [82]-[88] above, I am satisfied that by the time it issued the tender letters, Venice had decided to replace the Bear Stearns IRS, and that it wished to do so without having to meet the wind-up cost in 2007. A proposal which rolled that wind-up cost into the terms of the new derivative was attractive to Venice. As a result, Venice chose the third option, with the Banks paying Bear Stearns a total of c €8m to effect the unwinding of the Bear Stearns IRS.

The result was that the Transactions were entered into in part for the purpose of providing protection against a significant increase in interest rates during the extended period of the Rialto Bond. The many statements made by Venice to that effect – for example in Resolution 129, Executive Resolution 3561 and in the representations made at Part 5 paragraph 3(ii)(B) of the Schedules to the Venice Master Agreement and otherwise – were, to that extent, correct.

However, that is not the whole story. In doing so, Venice also wanted to provide for its exposure in respect of the negative MTM under the Bear Stearns IRS, and to do so through the floor and cap in the Transactions. Venice was also attracted by the fact that the terms offered by the Banks would provide a short-term net cashflow benefit (in the first half of 2008).

This was the principal reason why the Transactions had a very significant MTM in the Banks’ favour from the outset (a combined positive Day 1 MTM of c €10.5m in the Banks’ favour).

This was the principal reason why the value to the Banks of the interest rate floor (estimated by the experts at between €12.4m and €12.974m) was more than five times the value to Venice of the cap (estimated by the experts at between €1.7m and €2.4m).

This was the principal reason why, on the basis of a Day 1 statistical probabilistic calculation, the probability of Venice losing money on the Transactions was high:

a)

On Ms Bowie’s calculations, the probability of a negative pay-off for Venice under the Transactions was between 77.1 and 78.7% (depending on whether or not the calculation is performed on an “absolute” basis or on a basis which discounts future cashflows to present value), whereas if the amount paid to wind up the Bear Stearns IRS is removed from the calculation, the figure is 59.3%.

b)

Mr Malik did not put forward his own calculation of the probability of a negative pay-off for Venice under the Transactions or challenge Ms Bowie’s calculation of 78.7%, saying that in his experience banks did not produce such calculations and he did not consider that they had utility for customers. He did perform a calculation removing the amount paid to wind down the Bear Stearns IRS from Ms Bowie’s calculation and arrived at a figure of 57.3%. The Banks’ closing submissions did not challenge Ms Bowie’s figure, but noted that “stripping out” the Bear Stearns IRS wind up cost reduced that figure to 57.3% on Mr Malik’s figures.

On Mr Malik’s evidence, it led to the floor being between 80 and 100 basis points higher than it would otherwise have been.

On Ms Bowie’s calculations, it meant that the Transactions involved a modelled “realistic worse case” outcome for Venice of the order of €70.6m (modelling to a 95% confidence level). Mr Malik gave evidence that the MTM distribution analysis which Ms Bowie had performed would be of limited use to customers, and that banks did not provide MTM distribution analyses to customers. He did accept, however, that the effect of including the large negative MTM from the Bear Stearns IRS was to lower the probability of the Transactions being positive in the future.

It meant that the terms of the Transactions were in material and financially significant respects (the level of floor and cap) not determined by the terms of the Rialto Bond (although I accept that important terms were so determined – the Notional Amounts, the amortisation rate, the maturity date and the interest rate received by Venice from the Banks).

It meant that the minimum interest rate which Venice was committing to pay was not aligned with the forward rate curve at the time of contracting.

It involved the assumption by Venice of a new and significant risk (viz of having to pay interest to the Banks at the floor level while receiving interest payments at a much lower rate) which did not arise under the Rialto Bond. While the character of the Transactions must be determined ex ante, some indication of the degree of risk run can be seen in the fact that by the end of the most recent payment period (24 June 2022), Venice had made total payments to the Banks of €70,995,695.95 (in part because EURIBOR 6m became negative in November 2015).

The Transactions were explicitly carried out in the terms adopted both to reduce the risks connected with the Rialto Bond and to cover the winding-up costs of the Bear Stearns IRS (CONSOB Determination (a)).

While many of the terms of the Transactions matched the financial characteristics of the Rialto Bond, important and financially highly significant terms were arrived at for other reasons (CONSOB Determination (b); the Court of Cassation Decision No 19013/2017, the Court of Rome 8 January 2016, Decision No. 212, the Court of Novara, 24 July 2012, Decision No. 569, and, the Court of Turin, 21 October 2021, Decision No. 4685).

There was a very significant difference between the MTM of the cap and the floor, such that Venice was providing the Banks with a protection of a significantly greater value than the protection it was obtaining from the Banks (the Court of Appeal of Milan in Decision No 2393/2020 and cf Standard Chartered Bank v Ceylon Petroleum Corp [2012] EWCA Civ 1049, [9]-[12]).

The fact that the desire to cover the winding-up costs of the Bear Stearns IRS was a highly significant factor in setting the terms of the Transactions itself pointed to the speculative character of the Transactions (Decision of the Court of Orvieto of 12 April 2012 and of the Court of Turin of 21 October 2021 in Decision No 4685/2021). It meant that the Transactions were, to a significant extent, serving the purpose of seeking to address a past adverse event (cf Standard Chartered Bank v Ceylon Petroleum Corp, [9]-[12]).

The significant non-alignment between the terms of the Transactions and the prevailing forward rate curve was also suggestive of speculation (Supreme Court Decision No 21830/2021).

The fact that Venice took on a significant new risk to which it was not exposed under the Rialto Bond was also suggestive of speculation (Professor Alibrandi’s evidence and cf. Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), [217], UBS AG v Kommunale Wasserwerke Leipzig GmbH [2014] EWHC 3615 (Comm), [159] and Standard Chartered Bank v Ceylon Petroleum Corp [2012] EWCA Civ 10494, [9]-[12])).

“akin to borrowing money but instead of repaying it on predictable terms, entering into a bet with a range of possible outcomes. Venice might never have had to repay the Bear Stearns money at all, if rates had suddenly risen to well above the cap and stayed there such that it was in the money throughout the life of the swap. Conversely, Venice might – as has in the event occurred – have had to pay it back many times over, because its impact on the floor level as resulted in Venice paying much more than would otherwise be the case. The only rational basis for proceeding in such a way is the possibility that the bet could have worked out better for Venice than if it had simply paid the Bear Stearns break cost itself …

Borrowing money on terms that one might never have to repay it, might have to repay a much greater sum, or might have to pay anything in between for it depending on where interest rates sit, is speculation”.

“An invalidity that - due to its speculative characteristics - must therefore affect the entire contract, and not only the part that concerned the imbalance between the MTM of the cap option and the MTM of the floor option, as also argued in the alternative by the appellant and, in the opinion of this Court, without foundation.”

First, that IRS transactions do not feature in the list in Article 3(17) of the 2004 Finance Law, which is said to contain an exhaustive definition of what constitutes “indebtedness” for the purposes of Article 119(6).

Second, that the contrary argument would be inconsistent with the guidance given in the 2007 MEF Circular.

Third, it is said that the argument is inconsistent with the decision of the Council of State, Italy’s highest court in administrative law matters, in Decision No. 3174/2017.

The terms of Article 3(17) of the 2004 Finance Law (“pursuant to Article 119(6) of the Constitution the following constitute indebtedness”; “in addition constitutes indebtedness”; certain operations "do not constitute indebtedness, pursuant to the to the aforementioned Article 119”) are far more redolent of a provision whose purpose is definitional rather than illustrative.

Article 3(18) – identifying what constitutes “investment” for Article 119 purposes – would appear to be exhaustive (and one can see every reason why it should be).

That conclusion is reinforced by the fact that, as originally enacted, Article 3(17) provided that “changes to the aforementioned types of debt are set by decree of the Minister of Economy and Finance, after consulting ISTAT, on the basis of criteria defined at the European level”. Those words were held to be constitutionally illegitimate by the Constitutional Court in Decision No 425 of 29 December 2004 (for reasons which I will turn to shortly). However, the suggestion that Article 3(17) identified “types of debt” to be changed in a particular way and on a particular basis strongly supports the argument that its terms were intended to be exhaustive.

That conclusion is also supported by the Constitutional Court Decision No 426/2004, which addressed a series of constitutional challenges to this part of the 2004 Finance Law. The Court defined the issue before it as follows:

“The question that arises is whether and to what extent the law of the State can lay down specific rules concretising and implementing the constraint laid down in Article 119(6) of the Constitution, in particular by defining what is meant, for these purposes, by 'indebtedness' and 'investment expenditure'. These are not notions whose content can be determined a priori, in an absolutely unequivocal manner, on the basis of the constitutional provision alone, of which this Court is able to offer an exhaustive and binding interpretation for all, once and for all. These are notions that are based on principles of economic science, but which cannot fail to give room for rules of concretisation marked by some political discretion … The very definitions which the State legislature has provided … derive from economic and financial policy charges.”

(emphasis added).

The challenge brought to Article 3(17) (together with Article 3(20)) was that “they grant the Minister of Economy and Finance the power, essentially regulatory, to modify by decree the types of operations constituting debt and investment”. That challenge was upheld on the following basis:

“These provisions (one of which, paragraph 20, partly repeats the provisions of paragraph 17 as regards the types of debt, and extends the same mechanism to the types of investments) grant the Minister a power whose exercise may entail a further restriction of the power of autonomous entities to resort to debt to finance their expenditure, and essentially translate into a delegation of the provisions contained in the aforementioned paragraphs, which define the notions of debt and investment for the purposes of applying the constraint set out in Article 119(6) of the Constitution to regions and local authorities. 119, sixth paragraph of the Constitution. However, such a provision would presuppose compliance with the principle of substantive legality, under which the exercise of political-administrative power affecting regional autonomy (as well as local autonomy) can be admitted only on the basis of legislative provisions that predetermine in a general way the content of the executive's rulings, delimiting its discretion”.

The conclusion that a statutory provision empowering the MEF to add “types of debt” to Article 3(17) was unconstitutional, because this would curtail the autonomy of regions and local authorities without the legislative sanction which Article 3(17) had itself provided weighs strongly against the suggestion that Article 3(17) is not exhaustive, and that it is open to someone other than the legislature (e.g. the courts by way of a process of interpretation of Article 119 of the Constitution or reasoning by analogy) to include new types of transaction within the Article 119 restriction.

Contravention of Article 119(6) exposes public officials to the imposition of very significant penalties. Article 3(15) of Law No. 289/2002 provides:

“Whenever the territorial entities take on debt to finance expenses other than investment, in violation of Article 119 of the Constitution, the relative acts and contracts are null and void. The regional jurisdiction sections of the Court of Auditors may impose on administrators who have adopted the respective resolutions sentencing to a financial penalty equivalent to a minimum of five and a maximum of twenty times, the reserve indemnity earned upon committing the breach.”

That consideration supports an interpretation which limits the concepts of indebtedness and investment for this purpose to transactions specifically enumerated in legislation.

Finally, the subsequent legislative history of Article 3(17) – in which new types of transaction were brought within the Article 119 concept of indebtedness by express enactment – also suggests that the list (as it existed from time-to-time) is exhaustive rather than illustrative. By 2021, the original list had been amended extensively by Article 1(740) of Law 296/2006, Article 62(9) of Legislative Decree No 112/2008 as amended in turn by Article 3 of Law 203/2008 and Article 1(289) of Law 170/2020. It is to be noted that certain of those changes were expressly prospective in effect – for example “financial leasing transactions entered into on or after 1 January 2015” and a provision relating to the provision of guarantees “as of 2015”.

“Operations that do not involve additional resources, but permit to overcome, within the maximum limit established by current State legislation, a temporary shortage of liquidity and to incur expenses that already have a suitable budget cover, do not constitute indebtedness, pursuant to the aforementioned article 119;"

(which I will refer to as “the negative proviso”) carry with them the implication that “all operations” which do not share those characteristics constitute indebtedness, even if they do not fall within the preceding list of debt types.

Simply looking at Article 3(17) itself, it seems to me more likely that the effect of the negative proviso is to remove transactions within the preceding list of debt types from the scope of Article 119.

On the alternative hypothesis, the word “operations” would be important but extremely vague, potentially bringing a very wide category of transactions into the scope of Article 119 simply because they do not share the characteristics referred to in the negative proviso. By contrast, if the negative proviso is intended to remove transactions of the preceding debt types from the concept of indebtedness for Article 119 purposes, the meaning of “operations” is clear (namely operations within the preceding list).

If the negative proviso is intended to provide an additional, free-standing, test for transactions falling within the concept of “indebtedness” in Article 119(6), it would seem to follow that transactions appearing in the list of debt types would still constitute indebtedness even if they did not involve additional resources and involved expenses that already had a suitable budget cover.

The argument would give Article 3(17) (defining “indebtedness” for the purposes of Article 119(6) which requires “resort to indebtedness only for the purpose of financing investment expenditure”) a very different structure to Article 3(18) (defining “investment” for exactly the same purpose), in that the former would include unlisted transactions which did not share the characteristics of the negative proviso, whereas the latter is simply a list of qualifying transaction types.

The argument appears to be inconsistent with the judgment of the Constitutional Court in Decision No 425, to the extent that it involves the court adding to the list of transactions constituting indebtedness through the application of the negative proviso.

“It seems appropriate to remind that the [2004 MEF Circular] of [Decree 389] already included a general consideration that no derivative is classifiable as a liability [emphasis in original].

Therefore, derivatives are identified, according to the rules mentioned above, as `debt management instruments and not as indebtedness’.”

The reference to the 2004 MEF Circular was to Article 3 thereof which identified permissible types of derivative transactions. A consistent theme of that Article was the need for a sufficient relationship between a derivative and an underlying transaction or liability. In that context, the 2004 MEF Circular stated:

“In addition, derivative transactions referring to other pre-existing derivative transactions are not allowed, on the basis that no derivative is a liability”.

The 2007 MEF Circular went on to state that the 2004 Finance Law had given “a precise and detailed definition of the concept of indebtedness, indicating the types of transactions to be considered as such in reference to the above constitutional law”. It then traced subsequent legislative changes to that definition, before summarising the position which had been reached in the following terms:

“Therefore, in light of the recent legislative changes introduced on the matter, the following have to be considered indebtedness transactions: mortgages and credit openings, bond issuances, securitizations of future income flows, securitizations with initial payment below 85 percent of market price, securitizations guaranteed by other public administrations, securitizations of receivables towards other public administrations, transactions entailing transfer and securitizations of receivables towards suppliers of goods and services.

In conclusion, the definition of swap as mere instrument of debt “management” is further confirmed by the fact that derivative instruments are not mentioned in any of the abovementioned provisions of law; therefore, in light of the above, derivative instruments do not qualify as indebtedness transactions.”

On the bank’s part that “the purpose of the swaps that were executed was to obtain costs savings based on lower interest paid” on the underlying debt (paragraph 1).

On the municipality’s part, that what constituted expenditure depended “on the notion of ‘expenditures’, regardless of the legal instrument used” and “solely relates to the financial effect of that instrument” (paragraph 9). The municipality also argued that the swaps in question “had a speculative purpose due to the absence of a cap on the interest rates exchanged” (ibid).

These were brought within Article 3(17) by an amendment made on 25 June 2008 (by Article 62(9) of Law Decree No. 112 of 25 June 2008):

“In Article 3, paragraph 17, second sentence, of Law no. 350 of December 24, 2003, after the words: ‘assignment of receivables due from other public entities’ the following inserted: ‘and, based on criteria defined in the Statistical Office of the European Communities (EUROSTAT), any premiums received at the conclusion of derivative transactions’.”

That amendment stated that the contents of the law Decree were “in force as of 1 January 2009” and, on its face, appears only to have prospective effect. It is not, therefore, applicable on its own terms to the Transactions.

There is a clear finding that derivative contracts which involve upfront payments constitute recourse to indebtedness (and by implication expenditure for Article 42(2)(i) purposes) ([10.1.3]). That much is not in doubt.

The immediately following paragraph ([10.1.4]) appears to reject the suggestion that swaps which do not involve an upfront necessarily amount to indebtedness:

“If the money obtained with the upfront must be considered indebtedness, the same cannot be said of the IRSs concluded by public entities which, eventually, may presuppose an indebtedness. A swap transaction must be examined as a whole, because its effects may essentially amount to indebtedness, as was demonstrated by the local entities that were able to use IRSs as loans, and, through them, actually modify and manage the level of the indebtedness (without saying that those IRSs usually arouse of, by law, preceding indebtedness).”

Paragraph 10.2 provides:

“In regard to the municipal body that is required to authorise the use of IRSs, prevailing legal scholars and case law have, rightfully, held that the City Council has this authority.”

Read in isolation, this would suggest that the Supreme Court is expressing its approval of the view expressed by legal scholars and case law that the City Council must authorise the use of (sc. all) IRS transactions. However, if so, that would suggest that this would be the case even in cases when “examined as a whole” (as [10.1.4] requires), the transaction did not “essentially amount to indebtedness”. Further, if the reference to “case law” was intended to embrace the Council of State Decision No 3174/2017, it would not be accurate to suggest that this had held that the City Council had to approve all IRS transactions (see [241]-[243] above).

By contrast, [10.3] appears to contemplate that the court is considering only two specific issues – whether a swap in the context of debt restructuring and a swap including an upfront clause – constituted indebtedness, rather than any more general enquiry.

[10.4] and [10.5] undoubtedly offer support for Venice’s interpretation:

a)

[10.4] offers a rationale for a requirement of City Council approval (the need to ensure the involvement of minority members) and contemplates that the mere fact that the swap is intended to be debt-reducing is not sufficient to take it outside the City Council’s sphere of responsibilities (because although the swaps may have been “concluded … with the purpose of renegotiating loans on more favourable terms” they may “entail expenses … [which] impact financial years after the year the contract was entered”).

b)

[10.4.1] suggests the City Council needs to approve transactions which “may” impact future financial years.

c)

[10.4.2] and [10.5] note that only hedging swaps are permissible, pre-supposing the existence and perhaps the amendment or termination of an underlying debt transaction which will itself have required City Council approval. Those matters provide support for the view that the City Council must approve the swap as well.

By contrast, the immediately following paragraph, [10.6], which appears to have been intended to draw a conclusion from those preceding it (“we must therefore rule”) clearly does not hold that all swaps require City Council approval, but only those where certain conditions are met:

“If the IRS concluded by the Municipality affects the total amount of the entity’s indebtedness, the financial transaction must, upon penalty of voidness, be authorised by the City Council”.

[10.7] is expressed as a conclusion following from the preceding paragraphs (“as a result”). It provides:

“The appealed judgment cannot be challenged that the swap contract and, particularly, (but not only) the contract that included an upfront clause constituted, because of its aleatory nature, a form of current or potential indebtedness for the public entity”.

The reference to the conclusion of the Court of Appeal of Bologna, and the language which clearly repeats the summary of the conclusion of the Court of Appeal which the Supreme Court had previously set out at [2.1(a)], does suggest that the Supreme Court was endorsing the conclusion reached by the Bologna Court of Appeal. It is less clear whether that is a conclusion which is concerned with the specific swaps in issue, or a more general conclusion (although, notably, both paragraphs refer to “the swap contract”).

“In conclusion, those additional grounds must also be dismissed, according to the rule of law that:

Authorisation for Italian Municipalities to conclude a swap contract, especially if they are of the type with an upfront loan, but also in all cases where its negotiation entails extinction of the previous underlying loan agreements or even if they remain outstanding, but with significant modifications, must be given, upon penalty of voidness, by the City Council pursuant to Article 42, paragraph 2, letter i) of the T.U.E.L. under Italian Legislative Decree No. 267 of 2000 where it provides that “The city council’s authority extends solely to the following fundamental actions: (...) ~ expenditures that affect budgets for subsequent financial years (...)”], as this is not comparable to mere act of management of the local entity’s indebtedness aimed at reducing the financial costs inherent to it, which can be adopted by the city board pursuant to its reserved managerial authority under Article 48, paragraph 2 of the T.U.E.L.”

Swaps “if they are of the type with an upfront loan”.

This picks up the statements that a swap with an upfront provision constitutes indebtedness in [10.1.2] and [10.1.3].

If the negotiation of the swap “entails extinction of the previous underlying loan agreements”.

This picks up the reference to the termination of indebtedness in [10.5].

If the negotiation of the swap entails significant modifications of the underlying loan agreements, even if they remain outstanding.

This picks up the reference to amending the underlying contract including “by extending the length of the debt exposure” in [10.5].

It follows that I have arrived at the same conclusion as that reached by Cockerill J in Busto, [325]. Cockerill J regarded that outcome as being one which “apparently sounds good sense” ([327]). Venice describes the Banks’ fallback case in reliance upon it as having been “adopted opportunistically rather than on a principled basis”. Even if that latter characterisation is correct, it is clear that the status of IRS transactions entered into by local authorities raises a number of conflicting interests, policy considerations and legal principles. If the decision in Cattolica as Cockerill J and I have interpreted it is an act of judicial pragmatism rather than a principled determination, that does not affect its status as a statement of Italian law.

The Court of Appeal of Venice in Decision No 696/2022 referred to Cattolica as having decided that City Council approval was required for swaps which involved an upfront payment or entailed the extinguishing or significant modification of the underlying loan, as did the Court of Appeal of Rome in Decision No 6894/2021 (in which they engaged in analysis which would have been wholly unnecessary if Venice’s interpretation of this aspect of Cattolica was correct) and the Court of Auditors of the Lazio Region in Decision No 42/2022 also quoted only [10.8] of the judgment when summarising the Supreme Court’s decision on this issue.

The Berti Article described the Supreme Court as having held that City Council approval was required in “at least two cases”, being the two instances referred to in [10.8]. The Banks have informed the court that Andrea Berti was Cattolica’s in-house counsel, which makes the absence of any statement that City Council approval is always required for swaps noteworthy.

By contrast, the Court of Appeal of L’Aquila in Decision No 567/2021 referred to Article 42(2)(i) being engaged “on the execution of a swap on the part of a local authority”.

effectively did what the Constitutional Court had held could only be done by legislation, and added new categories of indebtedness to the scope of Article 119(6); and

held that derivative transactions which involved upfront payments constituted recourse to indebtedness even before Decree 2008 had made an explicit legislative change to this effect, which was specified to take effect in 2009;

will already be apparent.

“BNL … argued that at the time the contract at issue was entered into (2005) the swaps with upfront were fully legitimate and did not fall within the notion of indebtedness, and this latter conclusion had also been expressly indicated by the Ministry of the Economy in the cited circular no 63013 of 22.06.2007. However, it should be noted that the Unified Sections of the Supreme Court, which enunciated the aforesaid maxim in relation to cases in which the contracts in question were stipulated in 2003 and 2004 affirmed the interpretative nature of the new rules (Article 62, paragraph 9 of Law Decree No 111/2008 which amended Article 3, paragraph 17 of Law No 350/2003) which for the first time defined the ‘upfront’ as ‘debt’ so that it did not set limits for the future on the use of derivatives by public administration but it did “interpret” the pre-existing negotiating and regulatory reality”.

The “significant negative mark-to-market value of the Transactions” and “the fact that there was a 72% likelihood that [the Transactions] would result in a net loss to Venice”, meaning “it was very likely (and has proved to be the case) that Venice would have to pay millions of euros to the Banks over the following years” which “was a commitment of a material proportion of Venice’s future resources” (“the First Argument”).

“The Transactions formed part of a major restructuring of Venice’s borrowings and associated derivatives whereby the maturity of the debt and termination date of the derivatives were both deferred for a period of 15 years until December 2037 and their respective terms varied” (“the Second Argument”).

“The question is therefore whether the Banks’ payments to Bear Stearns under the Novations amounted to an ‘upfront payment’ to Venice. The Banks submit that, plainly, they did not. These payments were not any form of compensation provided by the Banks to Venice. They were instead the price which the Banks, as transferees, needed to pay to buy out the existing rights of the transferor, Bear Stearns, under the Novations. That was a necessary part of enabling the Bear Stearns IRS to be unwound …”

The rationale for treating a swap with an upfront payment by the bank to the local authority as expenditure or indebtedness is because it involves taking a benefit at one point in time (and in one financial year) in return for structuring the transaction in a manner which, in Day 1 PV terms at the date of transacting, is adverse to the local authority, with the attendant enhanced risk of payments by the local authority in subsequent financial years. It may be that there will never in fact be a negative cash outflow by the local authority (because the market moves in a manner which ultimately reverses that adverse Day 1 PV from the local authority’s perspective). However, Cattolica decides that, as a matter of Italian law, that risk is sufficient to engage Articles 119(6) and 42(2)(ii).

That rationale is equally applicable in the present scenario. There was “jam today” (in that the funds were made available to meet the price of exiting a transaction which Venice wished to exit) in return for accepting a greater risk of bare bread tomorrow. The fact that the “upfront” here was not paid to neutralise an imbalance in the MTM of the respective obligations, but the respective obligations are structured in an unbalanced way to cover the cost of the “upfront” does not negate the issues of inter-budgetary equity which Article 42(2)(i) recognises nor the limits of Article 119(6) as established in Cattolica.

I accept Mr Cox KC’s argument that the fact that the payment in question moves from the Banks to Bear Stearns rather than through Venice does not change the analysis. Professor Gentili accepted in cross-examination that if A (sc Venice) had asked C (sc the Banks) to make the payment to B (sc Bear Stearns), it would still be treated as an upfront payment by C to A (Day 6/107). That is essentially what happened.

While in no way determinative, it is noteworthy that the Banks referred to the payment being made to Bear Stearns to unwind the Bear Stearns IRS as an upfront. A particularly telling internal communication, in the context of the case as a whole, was a note prepared by Intesa in 2009 when explaining the high negative MTM of the Transactions from Venice’s perspective by “the need to absorb the Upfront paid to the municipality for the early termination of the derivative with Bear Stearns”.

“The second and third situations described by Cattolica involve, respectively, the extinguishing and modification of pre-existing loans. But the Transactions did not extinguish or modify (and were not themselves) ‘loans’; they were debt management instruments, entered into by Venice to hedge its interest exposure on debt (i.e., the restructured Rialto Bond) …

It is correct that the Transactions formed part of a major restructuring of Venice’s borrowings under the Rialto Bond and that the restructuring of the Rialto Bond was a significant modification of Venice’s debt affecting its budget for future financial years. However, it does not follow that the Transactions also modified Venice’s debt. The Transactions had no effect on the principal amount owing under the Rialto Bond, which remained the same following the restructuring (albeit with an extended maturity date). Venice’s argument would mean that any swap which hedged an underlying loan, where that loan was simultaneously restructured in a way that significantly modified a borrower’s debt, would itself require City Council approval. That cannot be spelled out of TUEL Article 42 or from the treatment of that provision in Cattolica .”

“The example is a cashflow swap in which the bank and the local authority swap cashflows by reference to different underlying obligations. This could include the cashflows which would be due on an actual underlying loan and the cashflows which would be due on a different hypothetical loan.”

The examples given involved, in effect, cases in which the bank would make payments equivalent to the amounts due under the existing loan on the dates they were due, in return for the local authority making the payments to the bank which would have fallen due had the loan been for a longer period or had a different amortisation profile.

It follows from my conclusion that the Transactions, as a whole, were speculative that they were not undertaken for the purpose of financing investment expenditure.

In any event, focussing on the upfront payment which (per Cattolica) was the loan element which rendered the Transactions a recourse to indebtedness, that was not entered into for the purpose of financing investment expenditure, but in order to meet the winding-up costs of the Bear Stearns IRS. I do not think it is sufficient, as the Banks contend, to argue that the Rialto Bond was issued to finance expenditure, and that the upfront was paid as part of a transaction undertaken to restructure that debt (the “ancestor” indebtedness argument).

That will be the case in many of the IRS transactions entered into by Italian local authorities, which often involved the restructuring of underlying loans and their associated IRS transactions, with the upfront for the new IRS transaction covering the negative MTM on the original swap. It will be recalled that this was the background to the second swap transaction in Cattolica itself (see [213]).

The upfront paid to the benefit of Venice in this case did not in any way reduce or replace the outstanding amount under the Rialto Bond, but created “new debt”.

Article 119 is specifically directed to local authorities, rather than a provision of general application, and is directed to the entry by local authorities into transactions of a specific type.

The restriction imposed does not relate to an activity which is inherently wrongful, but on the contrary an activity which is lawful for other legal and for natural persons.

Article 119(6) specifically confers the power to have recourse to indebtedness on local authorities, but does so in terms which restricts that power to indebtedness for a particular purpose (like s.50 of the Norwegian Local Government Act 1992 considered in Haugesund). Like s.50, the effect of Article 119 is “both to grant power … to conclude certain types of loan contract and also to restrict their power to conclude certain types of loan”.

Local authorities have general contractual capacity under Italian law.

Article 3(15) of Law No. 289/2002 provides that where a local authority takes on debt for a purpose other than investment in violation of Article 119, the relevant acts and contracts are “null and void” and an administrative penalty can be imposed on the relevant administrators. It is said that this is more consistent with Article 119 imposing a prohibition than a restriction on a local authority’s capacity.

It is pointed out that the local authority (but not its counterparty) is able to enforce contracts which infringe the 2008 Decree and the 2013 Finance Law.

on Venice’s own case, the principle of law it relied upon in support of the Speculation and Indebtedness Arguments emerged “first and foremost from Cattolica”, and is “an important principle which emerges from recent Italian jurisprudence”; and

in relation to the issue of indebtedness, and in particular the status of “upfronts”, the Supreme Court by a process of what it described as interpretation concluded that legislation introduced by Decree 2008 and which took effect in January 2009 was simply stating the law as it had existed from 2001.

“Attributions of City and Province Councils

City and Province Councils are the political-administrative guidance and control bodies.

City and Province Councils shall be responsible only in respect of the following fundamental acts:

i) expenditure which commit the budgets for subsequent financial years, with the exception of expenditure relating to the rental of buildings and the supply of goods and services on a continuing basis.”

Article 48 deals with the “Competences of the City Board”. Article 48(2) provides:

“2.

The city board performs all acts pursuant to Article 107, paragraphs 1 and 2, in the functions of government bodies, which are not reserved by law to the city council and that do not fall within the powers, provided for by law or by the statute, of the mayor or of the president of the province or of the decentralization bodies; it collaborates with the mayor and the president of the province in the implementation of the general guidelines of the city council; it reports annually to the city council on its activities' and it carries out proposal and impulse activities towards the same (the city council).”

Art. 107, headed “Functions and responsibilities of the city servants”, provides:

“1.

Civil servants are responsible for managing offices and departments according to the criteria and rules laid down by the statutes and regulations. They comply to the principle by which the powers of guidance and political administrative control are the responsibility of government bodies, while the administrative, financial and technical activity is attributed to municipal servants through autonomous powers of expenditure, organization of human resources, control and instrumental power.

2.

Civil servants are responsible for all tasks, including the adoption of administrative acts and measures that commit the administration externally, which are not expressly included by law or by the municipal statute among the functions of political-administrative direction and control of the governing bodies of the entity or not included among the functions of the secretary or general manager, as per articles 97 and 108 respectively. Art. 147(4).”

“Determinations to stipulate and related procedures

The stipulation of the contracts must be preceded by a specific determination by [the person/civil servant] in charge of the expenditure procedure indicating:

a) the purpose that the contract intends to pursue;

b) the object of the contract, its form and the clauses considered essential;

c) the methods for choosing the contractor admitted by the provisions in force regarding public administration contracts and the underlying reasons.

In any case, the procedures established by the implemented European Union legislation or in any case in force in the Italian legal system apply.”

From Venice’s perspective, Cattolica approaches the issue of whether Article 42(2)(i) is engaged by reference to the concept of indebtedness, and repeatedly stresses the close link between that issue, and the issue of whether there has been a breach of Article 119: see for example the introduction to [4] (“the first three grounds for the main appeal … were connected”); [4.1] (“two issues that were closely connected”); [3] of the Reasons section (“two closely related questions”); and section 10 passim.

From the Banks’ perspective, accepting this equivalence allowed it to run its argument that Article 3(17) of the 2004 Finance Law contained an exhaustive definition of indebtedness which did not include IRS transactions.

However, I do not think that Venice actually conceded that, if its argument as to the non-exhaustiveness of Article 3(17) of the 2004 Finance Law was rejected, it followed that Article 3(17) of the 2004 Finance Law determined not only what constituted indebtedness for the purposes of Article 119, but also what did and did not constitute expenditure for Article 42(2)(i) purposes.

Article 3(17) does not purport to specify indebtedness for the purposes of Article 42(2)(i) of TUEL, but only for the purpose of the limitation in Article 119(6) of the Italian Constitution. Thus paragraph 17 provides:

“For entities, referred to in paragraph 16 above, pursuant to article 119(6) of the Constitution the following constitutes indebtedness”.

The purposes of the two provisions are not the same. Article 119 of the Constitution is concerned with limiting the purposes for which a particular liability can be incurred, and creates an absolute prohibition against incurring liabilities of the relevant kind save for a particular purpose. Article 42(2)(i) is concerned with the duration of the commitment rather than the purpose for which it is incurred, and addresses the issue of who is entitled to take the decision to incur the commitment rather than prohibiting such transactions altogether.

The decision of the Council of State, Italy’s highest court in administrative law matters, in Decision No 3174/2017, when considering whether swap transactions which had been entered into without complying with Article 42(2)(i) of TUEL were enforceable, does not refer to Article 119 of the Italian Constitution nor Article 3(17) of Law 350/2003.

“Revenues and costs associated with indebtedness must be certain, in the sense that they must be rationally predictable and cannot expose the public budget to an erratic performance that does not make it possible to guarantee continuity in planning and the achievement of its aims.”

In closing submissions, Mr Cox KC submitted that a purpose of Article 42(2)(i) was to bring the regime for approving individual “off-balance sheet” expenses into line with those subject to approval within the multi-year budget (something which was common ground between Professors Torchia and Domenichelli).

the (ex hypothesi written) resolution by the City Council must comply with Article 192 of TUEL (which I understand to mean both that the decision must have addressed the matters in Article 192 and that those matters must be addressed in the written document, imposing a requirement both as to the nature of the City Council’s decision-making and the form in which it is expressed); and

the effect of Cattolica is that (whether or not Venice is right in contending that the Article 192 requirements apply to a decision of the City Council) the matters which Article 192 require to be included in the resolution include “the MtM, the price of the proposed transaction, the consequent adjustments to the budget, the hidden costs, the presence of any upfront clause and the probabilistic scenarios” (which appears to be the qualitative distribution of the probabilities of which the MTM is the weighted average) – information referred to as “the Required Information”.

At least in the translations before me, Article 192(1) is addressed to “the person/civil servant/[responsible party] in charge of the expenditure procedure”, not the City Council. When I asked Mr Cox KC in the course of oral closings how I was to resolve the dispute as to the interpretation of the provision at that stage, he expressed confidence that the issue could be agreed, but went onto confirm that Venice accepted that the language of Article 192 indicated that its contents were addressed to those with technical rather than political responsibilities.

Articles 42 and 192 appear in very different sections of TUEL: Article 42 in Part I (“Institutional Ordinance”) Title III (“Organs”) Chapter I (“The governing bodies of the municipality and the province”) and Article 192 in Part II (“Financial And Accounting Order”) Title III (“Management of the Budget”) Chapter 4 (“Principles of management and management control”).

The technical content of Article 192 – identifying the key clauses and the tender process – are matters of obvious relevance to the executive branch of the municipality, but outside the ordinary experience and competence of the elected members of the City Council.

That analysis, which was put forward by Professor Torchia, is supported by Article 107 of TUEL which provides:

“Functions and responsibilities of the city servants

1.

Civil servants are responsible for managing offices and departments according to the criteria and rules laid down by the statutes and regulations. They comply to the principle by which the powers of guidance and political-administrative control are the responsibility of government bodies, while the administrative, financial and technical activity is attributed to municipal servants through autonomous powers of expenditure, organization of human resources, control and instrumental power.

2.

Civil servants are responsible for all tasks, including the adoption of administrative acts and measures that commit the administration externally, which are not expressly included by law or by the municipal statute among the functions of political-administrative direction and control of the governing bodies of the entity or not included among the functions of the secretary or general manager, as per articles 97 and 108 respectively.”

The activities contemplated by Article 192 naturally fall within the matters for which civil servants are responsible within the dichotomy which the second sentence of Article 107(1) creates.

It is also supported by the following passage from the decision of the Administrative Regional Tribunal of Calabria Decision No 153 of 13 February 2004:

“In local authorities, according to art. 32 and 56 of the law n. 142 of 1990, the resolution to negotiate was the responsibility of the Council; today, however, ‘the determination to contract’, while maintaining the same contents (it must, in fact, always specify the purpose that the contract intends to pursue, the object of the contract, its form and clauses deemed essential, as well as the methods for choosing the contractor admitted by the provisions in force on public administration contracts and the reasons of this choice), is a management act, which is the responsibility of the person in charge of the expenditure procedure (art. 192 TUEL), which follows the resolution of council, expression of the power of direction and political-administrative control (art. 107, paragraph 1, TUEL). On the other hand, it is the managers who must implement the objectives and programs defined with the guidelines adopted by the council and it is they, in particular, who assume the responsibilities of the procurement procedures (Article 107, paragraph 2, letter b).”

Finally, it receives significant support from the Council of State Decision No 4192 of 20 August 2013.

a)

That decision emphasised the constitutional significance of the different roles of the City Council, the City Board and the directors in what was referred to as a “distribution of responsibilities between political and bureaucratic bodies as outlined by [TUEL]”. That division of responsibilities was adopted “to convert the Municipal City Council from a body with general and residual jurisdiction … into a body with specifically identified and exclusive powers”, in order “to make the Municipal Council’s institutional life lighter, as this was notably weighed down by all the myriad of tasks [that] burden the Council”.

b)

The argument that the terms of the Article 192 (and the technical requirement it imposes) applies to the City Council cuts across that “distribution of responsibilities.” The Council of State observed that “the Municipal City Board is a governing body of the local authority and therefore performs a function of political implementation of the fundamental choices made by the Municipal City Council, while the directors are responsible for technical, financial and accounting management and for taking all the administrative measures or acts of private law necessary to achieve the objectives established by the governing bodies”.

“As far as the procedural sequence is concerned, there is first a resolution issued by the Municipal Council, in the cases described in Article 42 of TUEL (or by the Council Board in all the cases described just above), which is followed by the decision to enter into a contract pursuant to Article 192 of TUEL, which is the duty of the individual responsible for the cost procedure (which, in cases where the Municipal Council or Council Board has the power, is limited to referring to, if not actually copying, the resolution passed by the above-mentioned collegial bodies), and finally the entering into of the contract by the sector manager (who may also be the same person who is responsible for the procedure).”

First, that any contrary conclusion would be tantamount to a delegation or abrogation of the City Council’s functions. However, the decision whether or not to give the approval, and subject to what conditions, would be a matter for the City Council, even if Article 192 only applied to executives.

Second, that without such a restriction, the City Council would not have access to the quality of information they would need to be able to enter into a contract. However, even leaving aside the assumptions inherent within this analysis as to what information it is necessary for the City Council to have in order to enter into a binding contract, that does not dictate that any requisite knowledge must be held within one part of the internal governance structures of Venice (the City Council) rather than another (the civil servant in charge of the expenditure procedures), with the terms of Article 192 itself suggesting that the latter is the more obvious repository.

The argument that a City Council resolution on a matter falling within Article 42(2) which concerned the entry into a contract had to comply with Article 192 was clearly raised by the municipality before the Court of Appeal of Bologna. At [2.2] of its judgment, the Court of Appeal summarised one of the Municipality’s arguments as follows:

“It insists on the fact that …. the use of debt should have been resolved by the city council pursuant to Art 192 letter (b) (content of the resolution to contract) and [Art] 42, paragraph 2, letter )i).

The Resolution passed on 27.03.2003 by the City Council preceding the first contract merely provides `guidelines’ and did not have the contents required by Art 192”.

(emphasis added).

That conclusion was upheld by the Bologna Court of Appeal at [4.2]:

“The initial council resolution … in no way identified the subject, form and content of the clauses considered to be essential, the methods for choosing the contracting party pursuant to Art 192 of the Consolidated Law on Local Entities (which establishes the general competence of the manager but which must be considered applicable with regard to the content and as the appellant notes, even if the competent body differs”.

However, this was not a point which the First Civil Division referred to in the Interlocutory Order, and Article 192 was not referred to in its (substantial) list of “rules that are important in the context of the argument carried out”.

Neither the argument of the Municipality referred to at i) nor the decision of the Bologna Court of Appeal referred to at ii) appear in the Supreme Court’s summary of the arguments and the prior findings. What does appear is the following at [10.4.1] (but without any attribution, or even reference, to Article 192):

“The city council must evaluate the cost-effectiveness of transactions that may constrain the use of future resources and make clear that the local entity’s transaction must follow the rules of public accounting that govern the carrying out of the responsibilities of entities that use public resources. Therefore, if a Municipality wishes to enter into a debt restructuring transaction, it must identify its main characteristics and the means to implement it and then use a tender proceeding to choose the best offer in relation not only to the goal it seeks to achieve but also the methods it wants to use, since the public administration must conform its actions to principles of affordability and economic cost-effectiveness”.

The (added) italicised words clearly pick up the language of Article 192. But whereas the first sentence refers to what the City Council must do, the second sentence uses the potentially broader and more ambiguous terms “the Municipality” and “the public administration”.

There is also the curiosity of where this passage appears in the judgment: as one of a number of factors cited “in support of the city council’s choice”, but not in the conclusory [10.6], [10.7] and [10.8]. As Cockerill J noted in Busto, [362], [10.4.1] of Cattolica “forms part of the lead up” to the legal principles the decision formulates, by way of a “backdrop”. It seems improbable that an arrival of such significance should have appeared unnamed and unannounced at the side-door.

The City Council was required to evaluate the cost-effectiveness of the recourse to indebtedness.

The resolution must identify and approve the amount of the upfront (otherwise the City Council could not do what, on the Supreme Court’s conclusion, it was obliged to do, namely approve the decision to enter into a derivative transaction which involved recourse to indebtedness).

Implicitly, the Supreme Court upheld the Court of Bologna’s decision that the resolutions of the City Council in that case were not sufficient, having earlier noted (at [2.5]) that the Court of Appeal had found that “the city council’s resolution of 27 March 2003 provided a mere ‘guideline’ which was subsequently implemented by the City Board and by the head officer ….” (and at [5.3]).

to authorise the modification of the terms and conditions of the twenty-year variable rate debenture loan called “Rialto” issued in the form of private placement, ISIN code XS 0160255856, for a nominal amount of EUR 156,082,000.00 and in particular the modification of the margin on the interest rate applicable up to a maximum of 0.23% of the duration of the loan, which may be extended up to 2037, and of the amortisation plan (with reformulation of the principal amounts as per amortisation plan

attached hereto);

to also authorise the restructuring of the existing derivative transaction in relation to the aforementioned loan in the most appropriate forms, including the replacement of the original counterparty with the banking institutions appointed as Co-arrangers, Co-consent Coordinators and Dealers indicated in the recitals in in relation to the transaction referred to in point 7 above), also proceeding to the drafting of the relevant ISDA

contract, if applicable;

to authorise the Interdepartmental Directorate for Finance and Accounts to carry out all the acts consequent to this resolution, and

in particular:

a. the adoption of all acts necessary for the call of the debenture holders’ meeting, also abroad, for the purpose of the resolution with which the modifications of the debenture loan of EUR 156,082,000.00 will be authorised, including the publication of the relevant notices in the newspapers and/or other forms of collective disclosure, as provided for by contract;

b. the signing of the documents necessary to modify the terms and conditions of the debenture loan, in accordance with the decisions of the debenture holders’ meeting;

c. the definition of the final terms and conditions of the debenture loan and, in particular, to authorise the determination of the margin on the interest rate applicable to the loan up to a maximum of 0.23% Euribor 6 months, the extension of the expiry date until 2037 and the approval of the relevant final amortisation plan, as well as authorising the execution of all the documentation necessary for such
purposes, including the issue of a new payment delegation to replace or supplement the original delegation issued by the Municipality in relation to this loan;

d. the negotiation and execution of the documentation necessary for the restructuring of the derivatives transaction relating to the same debenture loan, in compliance with the provisions of Article 41 of Law no. 448/2001 and the related implementation provisions, including the ISDA documentation (Master Agreement and Schedule) with the new “Swap” counterparties referred to in point 8 above, as well as the definition of the final terms and conditions of these restructuring transactions”.

“The decisions on the matters referred to in this article may not be adopted urgently by other bodies of the Municipality or Province, except those relating to budget changes adopted by City and Province Boards to be submitted for ratification by City and Province Councils in the following sixty days, under penalty of forfeiture.”

the Speculation and Indebtedness Arguments at Sections I, J and K above;

the insufficiency of the Resolution adopting the minimum requirements established by Cattolica at [298] above; and

the characterisation of Venice’s TUEL arguments at [304]-[316] below;

I have not found it necessary to resolve these arguments.

“Applying the reasoning in the Haugesund Kommune case … , para 47, it is not contended by Ukraine that it had no power to enter into a Eurobond transaction, having entered into a number of such transactions in the past. Its case is that it had no power to enter into this Eurobond transaction because it was outside the “hard limits” set out in the budget law. The law could have been amended by Parliament, but not retrospectively.

However, the court accepts the Trustee's submission that this is not a case of lack of power, but of the power not being exercised as the law required. This is properly characterised as going to a lack of authority on the part of the actors concerned, and in particular the Minister of Finance, which is a different enquiry, with potentially different consequences ….”.

The present case is, if anything, a stronger set of facts than those considered by Blair J. At least as a matter of Ukrainian law (which the Court of Appeal went onto hold was irrelevant when considering the capacity of a state: [2018] EWCA Civ 2026), the “hard limit” prevented Ukraine from entering into bond transactions for so long as the limit would be exceeded. By contrast, on the assumptions on which this part of the case is to be approached, Venice could enter into the Transactions at the relevant time, provided the City Council took the decision to do so in an appropriate manner.

“(f) questions governed by the law of companies and other bodies corporate or unincorporated, such as the creation, by registration or otherwise, legal questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body;

(g) the question whether an agent is able to bind a principal, or an organ to bind a company or other body corporate or unincorporated, in relation to a third party”.

It will be noted that Article 1(2)(f) is not limited to questions of capacity in Haugesund terms, and that the seller’s argument was not limited to Article 1(2)(f).

“In seeking to characterise the issue in order to identify the correct conflicts principle, the concepts of ‘capacity’ and ‘validity’ must be interpreted by reference to a broad internationalist approach, not by reference to any concepts of domestic law: see Haugesund v Depfa at [47]. ‘Capacity’ is often used to convey the concept of whether someone can do something as a matter of physical or legal capability. For natural persons it may connote legal capability determined by reference to age or infirmity. For legal persons it may connote legal capability by reference what the objects or powers of a company or public body enable it to do. Even in such sense, it may have a wider connotation in its application to domestic law concepts than merely the inherent ability to enter into a particular type of transaction. It covers both the narrower and the wider sense in which the expression “ultra vires” is used in English law (see the classic passage in the judgment of Slade LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 at 276-278). In this respect questions of a “power” under a company's constitution are categorised as questions of capacity just as are those which govern its legal ability to enter into a transaction of a particular type: see Haugesund v Depfa” .

As I have noted, the seller’s argument embraced both Article 1(2)(f) and (g).

At [54], Popplewell J contrasted validity (concerned with matters “intrinsic” to the contract) with extrinsic matters “relating to the power or authority of those making the contract”.

His citation, at [56], of the celebrated passage of Lord Hoffmann’s judgment in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, 506 with its reference to a company’s “primary rules of attribution” which are “generally found in its constitution” and “general rules of attribution” (which I will refer to as secondary rules of attribution) such as agency, estoppel, ostensible authority and vicarious liability. Popplewell J then referred to the issue in the case before him as “one of attribution” ([57]) which he said was “concerned with the power or authority of natural persons to make their acts the acts of the company”, which turned on “the rules contained in a company’s constitution, supplemented by rules of agency”. He said that this question:

“is properly to be characterised as engaging the conflicts principles governing capacity, insofar as the constitution of the company, in its broad sense, contains the rules as to what acts are to be attributed to the company; and the conflicts principles governing agency, insofar as the rules of agency supplement the rules in the company’s constitution for the purposes of attribution”.

In my view, it is clear from this passage that Popplewell J is using the word “capacity” to refer to the primary rules of attribution as set out in the company’s constitution (interpreting that word in its Haugesund sense), both when they define the capacity of the company and when they define the authority of the company’s officers and organs.

In particular, Popplewell J was making it clear that the question of whether a corporation’s officers or organs had power to commit the corporation in a particular respect was (as a matter of English law conflicts analysis) a matter for the law of the place of incorporation ([59]) rather than, as in some other contexts, a matter for the applicable law of the agency relationship (see in particular the citation from Dicey, Morris & Collins at [62]). However, he noted that, had the issue been approached by applying the general conflict principles applicable to agency questions, Swiss law would also have applied ([61]).

It was precisely because Popplewell J did not regard himself as dealing with a question of corporate capacity properly so-called, but the primary rules of attribution in relation to a company, that he went on to consider an alternative argument by reference to a secondary rule of attribution (ostensible authority): an issue which could never have arisen had the absence of two signatures raised a question of capacity in the Haugesund sense. The ostensible authority argument was rejected because it was not arguable on the facts ([63]).

“SCU submits that the issue to be decided is whether CU can contract by means of the signature of a single prokurist. This is a question of the company’s ‘capacity’ governed by its constitution, or more accurately whether the acts of a single prokurist can be attributed to SCU”.

Later, the seller contrasted the case at hand with one where “no question of authority or attribution arises” ([38]).

“A sole prokurist has no actual authority to bind the company”

the issue before the court is whether the act of Mr Dei Rossi in purporting to enter into the Transactions “can be attributed to” Venice;

it is necessary to look at Venice’s constitution in the Haugesund sense to answer that question, as Mr Dei Rossi is an officer of a legal person and was acting in that capacity;

doing so, the answer is no for the reasons set out at [298] to [301] above; but

this does not exclude arguments by reference to secondary rules of attribution, including, in particular, the doctrines of ostensible authority and ratification under English law.

I accept that the Supreme Court in Cattolica found that the consequence as a matter of Italian law of the lack of approval by the City Council in the required form was that the resultant contracts were void, not merely voidable: [10.6] and [10.8] both state the contract must be authorised by the City Council “on penalty of voidness”.

I also accept that this represented something of a significant legal innovation. The Berti Article, 34 accepted that “according to the more traditional approach, the absence – or the existence of a radical defect – of the authorisation of a contract gives rise to a cause of action for the annulment of the negotiation …” (the view put forward by Professor Torchia), albeit Berti claims that there were rival theories, including an analysis by which the transaction would be ineffective unless and until adopted by the appropriate decision-maker.

I am not persuaded that the conclusion in Cattolica that lack of appropriate City Council approval renders a contract void as a matter of Italian law is so obviously untenable that I should conclude that it does not properly reflect Italian law. It would appear that different views had been expressed as to the consequence of non-compliance with Article 42(2) of TUEL. Further, the decision in Cattolica in this respect has been followed in a number of subsequent cases: Court of Appeal of L’Aquila Decision No 576/2021; Court of Appeal of Rome Decision No 6894/2021; and the Court of Auditors of the Lazio Region in Decision No 42/2022 (the first two of those cases confirming that the court can take the point of its own motion).

It did not know that Mr Dei Rossi lacked capacity until Cattolica; and

The acts of ratification relied upon were too equivocal.

what the City Council had and had not done and the terms of its Resolution;

the terms of Mr Dei Rossi’s Executive Resolution; and

the terms of the Transactions (including that the floor had been set to address the significant adverse mark-to-market in the Bear Stearns IRS and, in due course, the negative MTM on the Transactions);

and yet was content to stand by the Transactions, provide for them in their annual financial statements for every year from 31 December 2007 onwards and perform the Transactions without reserve until the Cattolica decision emerged in May 2020. It has been held that it is not necessary for a principal to know that its agent acted without authority to ratify a transaction (Brown v Innovatorone Plc [2012] EWHC 1321 (Comm), [856]; Ing Re (UK) Ltd v R&V Verisherung AG [2006] EWHC 1544 (Comm), [153]-[156] and Busto, [383]). That conclusion applies with even greater force in a context such as the present, in which the principal comes to acquire a different legal understanding of the scope of the documents or regulations determining the agent’s actual authority as a result of a legal decision handed down many years after the transaction is entered into.

The first and second amendments to the Bear Stearns IRS by confirmations dated 17 April 2003 and 6 August 2004 were not the subject of City Council resolutions at all, but only resolutions by Mr Dei Rossi.

The Resolutions of Mr Dei Rossi in relation to the Bear Stearns IRS and both amendments post-dated the date when the confirmations were signed:

a)

In relation to the original Bear Stearns IRS of 31 December 2002, Mr Dei Rossi’s resolution was signed on 11 February 2003.

b)

In relation to the first amendment of 17 April 2003, Mr Dei Rossi’s resolution was signed on 21 May 2003.

c)

In relation to the second amendment of 6 August 2004, Mr Dei Rossi’s resolution was signed on 10 September 2004.

At first blush, the second of those two contentions appears to be a particularly unpromising argument.

Venice does not have the benefit of any finding in Cattolica that non-compliance by an executive officer with the requirements of Article 192 (as opposed to non-compliance by the City Council with the requirements of Article 42(2)(i)) rendered the Bear Stearns IRS or the amendments not simply annullable but void. The terms in which the Supreme Court in Cattolica addressed the consequences of non-compliance with Article 42(2)(i) – at [10.2], [10.4], [10.4.1], [10.4.2], [10.5] and [10.8] – do not lend any obvious support to the view that the same consequence would follow from a breach by an executive officer of Article 192 (as opposed to what Berti had referred to as the “more traditional” annulment approach for which Professor Torchia contended). The decision of the Court of Venice in Decision No 696/2022 on which Venice relied in this respect, albeit referring to Article 192, was addressed (like Cattolica) to the consequences of a defective decision of the City Council, not an executive officer.

In relation to the first and second amendments, even leaving aside the issue of whether the amendments were sufficient to constitute “significant modifications” for the purposes of Cattolica, there is the further difficulty that Venice’s common mistake case would become significantly more difficult if the mistake was not as to the existence of the Bear Stearns IRS, but only as to its terms to the extent amended by those amendments. Indeed, it does not appear to me that Venice had advanced a common mistake in a scenario in which the original Bear Stearns IRS was valid, but the first and second amendments were not.

I am satisfied that Venice held out Mr Dei Rossi (who on the evidence was the primary point of contact for Bear Stearns in relation to the Bear Stearns IRS) to Bear Stearns as having authority in relation to the decision to enter into and otherwise deal with the Bear Stearns IRS just as it held him out to the Banks in relation to the Transactions. Given the very late stage at which Venice raised the Mistake Argument, and the understandable deficiencies in Venice’s disclosure in relation to a transaction originally entered into with a non-litigating party 20 years ago, I have concluded that I am entitled to infer that Venice provided Bear Stearns with a copy of City Council Regulation 194 which delegated authority to Mr Dei Rossi’s department, and other documents sufficient to establish Mr Dei Rossi’s authority to sign the Bear Stearns IRS and the two amending confirmations, and that Bear Stearns relied on the same.

The Bear Stearns IRS was performed by Venice, accounted for in Venice’s budgets and ultimately novated by Venice 6 years after it had been entered into on a basis which wound the Bear Stearns IRS up, without any suggestion that it was not valid. Any deficiency in Mr Dei Rossi’s authority was clearly ratified by Venice.

Article 3 of Decree 389 issued by the MEF pursuant to Article 41(1) of Law 448 of 2001, and of the 2004 MEF Circular issued by the MEF by way of guidance in the interpretation of Decree 389.

under Articles 42(2)(i) and 192 of TUEL setting out the requirements for the conclusion of a valid contract under Italian law, and in particular the requirements of oggetto and causa;

which result in the Transactions being void and/or unenforceable.

“Venice also advances a case to the effect that the parties chose Italian law to apply to aspects of the Transactions and so the mandatory rules (and indeed all other rules) of Italian law applied to the Transactions for that reason, as to which see Section L”.

“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 of that country which cannot be derogated from by contract, hereinafter called ‘mandatory rules’".

The fact that the bank had the right to assign the swap to a bank outside Portugal.

The ‘practical necessity’ for a relationship between the investor and a bank outside Portugal.

The use of standard international documentation (the ISDA Master Agreement).

The international nature of the swaps market in which the swaps were concluded.

The fact that the bank had entered into “back-to-back” hedging contracts with a bank outside Portugal in circumstances in which such hedging contracts were routine.

“The present case, is, of course, distinguishable in as much as the swap contracts with which this court is concerned did not contain any specific right to assign the contract to a bank outside Italy and there was no ‘practical necessity’ for a relationship between the investor and a bank outside Italy but two of the other three elements, considered by Blair J to be important, are present namely the use of standard international documentation, in the form of the ISDA Master Agreement and the routine back-to-back contracts concluded with banks outside Italy. The third element, the international nature of the swaps market in which contracts were concluded, is perhaps somewhat less obvious in this case than in Banco Santander .”

The contract was on the ISDA ‘Multi-currency – Cross Border form’ rather than the ‘Local Currency – single Jurisdiction form’ and thus contemplated more than one currency and the involvement of more than one country. The form signed by the parties was in the English language, despite that not being the first language of either party ([132]).

The back-to-back arrangements made with banks outside Italy were routine and therefore (objectively) foreseeable, reflecting how international the swaps market was ([133]).

Each of those factors was “enough on its own to demonstrate an international and relevant element in the situation such that it is impossible to say that ‘all elements (other than the choice of law) relevant to the situation’ are located in a country other than England such as (in this case) Italy”, continuing:

“The international dimension precludes any such assertion. The use of the ISDA Master Agreement is self-evidently not connected with any particular country and is used precisely because it is not intended to be associated exclusively with any such country”,

([134]), with the presence of “back-to-back” contracts being “highly significant” ([35]).

The fact that non-Italian banks had tendered for the original advisory contract ultimately made with Dexia was also “a relevant element” ([136]), but in the nature of “icing on the cake” in view of the other factors.

Once an international element comes into the picture, Article 3(3) with its reference to mandatory rules should have no application ([137]).

Beginning chronologically with the icing rather than the cake, non-Italian banks (Citigroup, Deutsche Bank, UBS, Barclays with another non-Italian bank, Depfa Bank also participating) were invited to tender for the swap transactions which Venice wished to explore.

The Transactions were on standard international documentation, in the form of the ‘Multi Currency-Cross Border form’ ISDA Master Agreement (although it should be noted that while the Venice Master Agreement and Schedules were executed in English, the Confirmation was in Italian and expressly referred to the application of certain Italian regulatory provisions to specified activities in the pre-contract phase). While these were single currency swaps in Euros, the Euro is an international currency and one of the key currencies of the international swaps market.

It was objectively foreseeable, given their routine nature, that one or both of the Banks would enter into a back-to-back hedging contract with a bank outside Italy. Dexia entered into a contract with Barclays Bank in London hedging its exposures under the Transactions. While Banca Opi hedged its transactions with another (Italian) bank in the Intesa Sanpaolo Group (which is an international group), that does not affect the routine and objectively obviously foreseeable prospect of banks entering into back-to-back swaps in the international swaps market in respect of contracts such as the Transactions.

Very significantly, the Transactions were entered into as part of a package which involved the transfer of the Bear Stearns IRS to the Banks as part of a mechanism to wind that transaction up. Not only, therefore, was an important aspect of the arrangements of which the Transactions formed part an international swap transaction (on the same ISDA form) between Venice and the Irish affiliate of a New York bank, but the Transactions were entered into as part of a package which included a three-way contract between Venice, the Banks and that US bank. Venice had no answer to this point, which made this a much stronger case than Prato.

“Implicit in the purchase of the collar is the purchase of a cap and the simultaneous sale of a floor, which is permitted solely for the purpose of financing the protection against rising interest rates provided by the purchase of the cap.”

(emphasis added).

It was comprehensively rejected by Christopher Clarke LJ in Regione Piemonte v Dexia Crediop Spa [2014] EWCA Civ 1298 (see [158]), on the basis that there was nothing in Decree 389 itself to support such a restriction, and because of the practical difficulties of ensuring that the MTM of the floor and the cap were evenly matched (Piemonte, [75]), noting that the 2004 MEF Circular was simply guidance in any event.

It was rejected once again by Walker J in Dexia Crediop S.p.A. v Comune di Prato [2015] EWHC 1746 (Comm), based on an interpretation of Decree 389 and the 2004 MEF Decree (Prato¸ [186]-[187].

It was also rejected by Cockerill J in Busto, [312]-[316] for essentially the same reasons, albeit the issue had not been pleaded or the subject of expert evidence before her.

It would require the parties to undertake complex valuation exercises using assumptions and models, in circumstances in which the valuation of a floor and cap is not an exact science but a subject on which different views could reasonably be held.

Banks are unlikely to be willing to disclose their proprietary models in order to enable the counterparty to satisfy itself of the methodology for arriving at the value.

Issues would arise as to the timing of the calculation of equivalence, given the risk of intra-day market movements.

The approach would offer no scope for a bank to cover its costs (including its costs of hedging), give it a return for assuming counterparty risk and to make a profit on the transaction.

Article 1322 provides:

“The parties can freely determine the contents of the contract within the limits imposed by law.

The parties can also make contract that are of not of the types that are particularly regulated provided that they are directed to the realization of interests worthy of protection according to the legal order”.

Article 1325 provides that:

“The requisites of the contract are:

1)

Agreement of the parties.

2)

Causa.

3)

Object.

4)

Form, when prescribed by law, under penalty of nullity”.

Article 1418(2) provides that the absence of any of these elements renders a contract void.

By Section 3(a)(ii), that it has and had the power to execute the Transaction Documents and any other documentation relating to the Transaction Documents that it is required to deliver and perform its obligations under the Transaction Documents and has taken all necessary action to authorise such execution, delivery and performance.

By Section 3(a)(iii), that such execution, delivery and performance does not and did not at any material time violate or conflict with any law applicable to Venice, 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 or any contractual restriction binding on or affecting it or any of its assets.

By Section 3(a)(v), that the obligations of Venice under the Transaction Documents as well as under all other written agreements and/or written notifications and/or documents entered into and/or executed pursuant to the Transaction Documents, constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms.

There was an additional representation:

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

I have here isolated the particular references pleaded in paragraph 23 of the Banks’ Particulars of Claim, to which compendious reference is made in the Banks’ written submissions, which appear of potential relevance to this argument.

“(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”.

In an English statutory context, the courts have set their face against any suggestion that a local authority or public body lacking capacity to enter into a particular transaction can nonetheless estop themselves from denying that lack of capacity (the authorities, beginning with Rhyl UDC v Rhyl Amusements Ltd [1959] 1 WLR 465 are collected in School Facility Management Ltd v Governing Body of Christ the King College [2020] EWHC 118 (Comm), [356]-[358]).

Given the origins of the two limitations on Venice’s capacity which I have found Cattolica to establish – the lack of a substantive power to enter into speculative derivative contracts and to have recourse to indebtedness for purposes other than funding investment expenditure – and the important policies of budgetary equilibrium and the need to protect the integrity of local authority finances in the interests of the public as a whole which those rules give effect to – it would be very surprising if Italian law was any different in this respect. The rationale underlying the English authorities – that bodies of constrained power should not by their own acts be able effectively to enlarge their powers, and thereby undermine the goals which those constraints are intended to achieve – applies with equal force in this context.

In the context of the ISDA Master Agreement, the leading commentaries recognise that the representations as to capacity are unlikely to provide practical legal protection. Dr Alistair Hudson, in The Law of Financial Derivatives (6^th, 2017), [6-167] suggests that these provisions involve “a clear paradox” because “if the party making the representation that it has capacity to contract does not actually have the capacity to enter into that contract, then the contract will be void ab initio. Therefore, the contract containing the representation (and thus the representation itself) has no effect”. The leading authority on derivative contracts (Professor) Simon Firth, in Firth on Derivatives, [11-038], suggests that “little protection is provided by these representations where a breach of them means that the Agreement is invalid because the representations will themselves be unenforceable, along with the other provisions of the Agreement”.

In Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890, 905, Hobhouse J observed of the swaps agreement in that case that “the contract … included the standard warranty of capacity ….; it is recognised by the plaintiffs in this action that it was ultra vires the council to give this warranty just as it was ultra vires the council to enter into the contract as a whole”.

The argument was rejected by Tomlinson J (on the basis of expert evidence of Norwegian law but with reference to English law as well) in Haugesund [2009] EWHC 2227, [172] (Comm):

“These arguments must in my view fail on the simple ground pointed out by Professor Graver that "there can be no power under administrative law for public bodies themselves to create new powers by representing that they have such powers". Unsurprisingly Professor Graver's evidence was not challenged. Mr Mitchell distinguishes between a power to enter into a contract and the power to make a statement independently of contract .. However, the answer to Mr Mitchell's point is given by Professor Graver. It was given too by Harman J in Rhyl UDC v Rhyl Amusements Ltd … where he pointed out that arguments of this sort which might avail against ‘private people’ cannot prevail as an answer to a claim that something has been done by a statutory body without it having the capacity so to do."

In the specific context of limitations on the capacity of Italian local authorities, in Regione Piemonte v Dexia Crediop Spa, [62], Christopher Clarke LJ observed (on an obiter basis) that “if Piedmont did lack capacity to enter into the Transactions, it [sc. the bank] would, of course, be unable to rely on any contractual estoppel since there would be no contract on which to found it”.

In Busto, [393]-[408], Cockerill J indicated that she would have rejected a similar argument, for reasons which I consider further in the following paragraphs.

the "compliance representation" to the effect that its entry into and performance of its contractual obligations was and would be in compliance with its articles, financial rules and any other applicable laws or regulations; and

the "hedging representation" – that it was entering into each transaction purely for the purpose of hedging its exposures and not for the purpose of speculation;

which the Judge found (at [300]) took effect as contractual undertakings.

“I do not consider that this assists Credit Suisse, or that Vestia could have extended their contractual capacity by representing (by contract or otherwise) that they have powers which they do not have or that it is within their powers to make a contract when it is not. A contract that is ultra vires the powers of a company is void, and it cannot be validated: see Chitty on Contracts (31st Ed, 2012) vol 1 at paragraphs 9-020 and 9–024, citing the judgment of Russell J in York Corp v Henry Leetham & Sons [1924] 1 Ch 557, 573: ‘An ultra vires agreement cannot become intra vires by means of estoppel, lapse of time, ratification, acquiescence, or delay’. Although this was said in the context of the capacity of a local authority, the editors of Chitty clearly understand it to be a wider statement of principle, and I agree. The same is said by the editors of Spencer Bower, The Law relating to Estoppel by Representation, (4th Ed, 2004) at paragraph VII.6.1: ‘nor [can] a company become entitled by estoppel to exceed its statutory powers or those given to it by its memorandum of association’ … In my judgment the representations in the Master Agreement and the Management Certificate do not enable Credit Suisse to argue that Vestia are estopped from disputing that the ultra vires contracts were within their capacity or from disputing the authority of Mr de Vries and Mr Staal to make the ultra vires contracts.”

"Would the Additional Representations so interpreted be inconsistent with a policy or principle of law that an entity cannot expand its own capacity by estoppel or contract? In my judgment they would not be. I readily accept that an entity cannot achieve what it has no power to do simply by stating or promising that it has the power, and that underlying the doctrine of ultra vires is a policy of protecting the public: see Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1, 36F/G per Lord Templeman. But there seems to me no reason that a legal entity should not in a valid contract undertake that the contract will not be used as a vehicle for purported transactions that are invalid because they are outside their capacity. Credit Suisse are not making a claim under the ultra vires contracts and in this part of their claim are not asserting that they are valid. Their argument is that they are entitled to enforce the Master Agreement as if the ultra vires contracts were valid."

Vestia was a private and not a public entity (with the result that the particular policy considerations which apply to any attempt, in practical terms, to enlarge the scope of the powers of bodies of the latter type are not engaged).

It was common ground that Vestia had capacity to enter into the ISDA Master Agreement (and indeed the effect of the Judge’s findings was that a number of valid swap transactions were entered into within the framework established by that agreement).

Andrew Smith J found that the standard provisions of the ISDA Master Agreement were not sufficient to reach the conclusion for which the bank was contending in that case, and it was the Additional Representations which proved decisive. In Busto, only the former were available.

The standard ISDA Master Agreement representations relied on are referable to the "Transactions" - which are defined as transactions that the parties have entered into or anticipate entering into. It logically followed that to the extent that the transactions are void for want for capacity they do not fall within the definition of "Transactions".

If the Transactions are void by reason of non-compliance with Italian legislation, Venice has failed to give notice of an “Incipient Illegality” as defined by Section 14 of the Venice Master Agreement, in breach of Section 4(f) as inserted by paragraph 4(ii) of Part 5 of the Schedule.

If the Transactions are void for any reason, Venice is in breach of the contractual warranties addressed in Section O above.

Section 4(f) provides:

“Notice of Incipient Illegality. If an Incipient Illegality occurs, the Government Entity [defined as Venice] will, promptly on becoming aware of it, notify the other party, specifying the nature of that Incipient Illegality and will also give such other information about that Incipient Illegality as the other party may reasonably require”.

An Incipient Illegality is defined as “the enactment of any legislative body with competent jurisdiction over a Government Entity which, once adopted, will render unlawful the performance by such Government Entity of any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of a Transaction or the compliance by such Government Entity with any other material provisions of this Agreement.”

I accept Venice’s construction that this provision is concerned with legislation which is passed after the ISDA Master Agreement is concluded. That is suggested not only by the fact that the event is described as “the enactment” of legislation, but the clause presupposes the legislation has yet to be adopted – given the words “which once adopted” and the description of the illegality as “incipient”. That construction is not only supported by the wording but reflects a practical distinction between legislation which has already been enacted when the ISDA Master Agreement is concluded (which the parties can consider when deciding whether and on what terms to enter into the ISDA Master Agreement) and post-contractual developments. That is a sufficient answer to this point.

In any event, the Banks made no effort to establish that Venice had become aware of any incipient illegality prior to the decision of the Supreme Court in Cattolica on 12 May 2020. Nor did the Banks make any attempt to argue that Venice had not given notice of that decision “promptly” or that any failure to do so had caused them any loss. Indeed, it was difficult to discern any causation counterfactual argument in respect of this particular complaint. It therefore takes the Banks nowhere.

under s.2 (presumably s.2(1)) of the Misrepresentation Act 1967; and

in the tort of negligent misstatement;

by reference to various express or implied representations said to be contained in the Venice Master Agreement, the drafts thereof, the Confirmation and Executive Resolution No 3561 of 20 December 2007 (albeit that would only appear to be relevant if the Transactions had been held to be void by reason of non-compliance with Articles 42(2)(i) and/or 192 of TUEL), which it is said were made without reasonable grounds for believing in the truth of the same and/or negligently.

The applicable law.

Whether the representation claims fall foul of the same principles of law which precluded the contractual claims.

What representations had impliedly been made (in particular from the circulation of draft contractual documents), and the proper interpretation of any express representations.

Whether the Misrepresentation Act 1967 applies at all if the Transactions are void.

Whether Venice owed the Banks a duty of care.

Whether Venice acted negligently and/or did not have reasonable grounds for believing any of the statement it may be found to have been made which were untrue.

Whether the Banks were induced by Venice’s statements as to the truth of those matters into entering into the Transactions (as opposed to a position in which the Banks required Venice to make those statements but was not relying on the fact that Venice had done so as a reason for believing that the statements were true).

If the claim is advanced under s.2(2) of the 1967 Act, whether it is precluded on the basis that rescission is not available.

In the light of my conclusion that the Transactions were void, the Misrepresentation Act 1967 has no application (School Facility Management, [368]). In this case, it is appropriate to treat the Venice Master Agreement and the Confirmation as a single agreement for this purpose (see [361] above). In any event, it was not the entry into the Venice Master Agreement which caused the Banks any loss. Had the parties concluded the ISDA Master Agreement but entered into no confirmations, there would have been nothing for the Banks to hedge. It was the apparent conclusion of the Confirmations which was the cause of the Banks’ decision to enter into hedging arrangements (cf Taberna Europe CDO II plc v Selskabet AF1 [2016] EWCA Civ 1262, [44]-[47]).

On the basis of the law as it was reasonably understood at the time of transacting (including by the Banks and, it is reasonable to infer, Clifford Chance and Beltramo) it was reasonable for Venice to believe that it did have the substantive power to enter into the Transactions, something which it is clear numerous local authorities had done in similar circumstances over the preceding years. The contrary argument ignores the extent to which (as the Banks themselves emphasised in other contexts) the legal position as it emerged from the Cattolica decision in May 2020 departed from the reasonable understanding in 2007.

For that reason, also, even if Venice did owe the Banks a duty of care, it did not act negligently.

Any claim under s.2(2) of the Misrepresentation Act 1967 fails because the Banks did not (for obvious reasons) establish (or seek to establish) a right to rescind the Venice Master Agreement (Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745) and was not, in any event, seeking damages in lieu of that right.

I would have had to consider whether my finding that Venice did not have substantive power to enter into the Transactions was also an answer to the misrepresentation or misstatement claim in this case. The contours of the argument on that issue might be influenced by the type and nature of the damages sought, which did not form part of this trial (cf School Facility Management Limited, [350]-[364]). In particular, I would have had to consider, in the context of a misstatement-based claim for damages, the implications of the decision on the availability of a defence of change of position in South Tyneside Metropolitan Borough Council v Svenska International plc [1995] 1 All ER 545, 565 (to which I return in the context of Venice’s restitution claim below) and the view expressed by Tomlinson J in Haugesund, [170]-[172] that the lack of contractual capacity in that case was also an answer to the negligent misstatement claim.

I would have had to give careful consideration to the issue of whether the evidence of Mr Binetti and Mr Belarbi, relied on this context, was sufficient to persuade me to conclude that there had been reliance in the relevant sense. In the case of Mr Binetti, his evidence was that he relied on the representations which reflected the parties’ common understanding. In the case of Mr Belarbi, it was his evidence that he relied on “Venice’s view that it was complying with the law” and that Dexia would not have entered into the Transactions if Venice had refused to make the representations. Against this background, and given (a) the Banks’ own expertise in this area; (b) the Banks’ greater understanding of the economics of the Transactions and (c) the legal advice available to the Banks from Clifford Chance, it would have been necessary to consider whether the Banks were relying on any representations by Venice as a reason for believing the represented state of affairs was true, or whether the making of such a representation was simply a pre-condition to the contract proceeding from a practical perspective (cf School Facility Management, [398]-[401]).

“Knowledge of causes of invalidity.

The party who, knowing or who should know of the existence of a cause of invalidity of the contract [1418 et seq.], did not inform the other party of this, is required to compensate the damage suffered by this party for having trusted, without its fault, in the validity of the contract [139, 1398].”

“Indemnification and Release

The Municipality is obligated, in addition to the legal requirements, release, hold harmless and compensate the Companies and/or every director, executive, employee and shareholder, as well as the member companies of the respective groups that shall be involved in the execution of the assignment described in this agreement, for losses, expenses, costs, damages and liabilities incurred by the same in the performance of this assignment or as a result of the same, within the limits depending on the negligence or fraud of the Municipality or as a direct or indirect result of noncompliance by the Municipality with the provisions of this mandate, and provided that they do not also result from the gross fraud or negligence judicially verified by the Companies.”

The applicable law (English or Italian law).

If the applicable law is English (and not Italian) law, does a defence of change of position arise in relation to the “back-to-back” Hedging Swaps entered into by the Banks?

Whether and to what extent any claims are time-barred (under English or Italian law, as appropriate)?

Issues as to the existence of a contract are governed by the law which would apply if the contract had been concluded (Article 8(1)), which in this case would be English law by virtue of the choice of law agreement in the Venice Master Agreement.

Issues as to the consequences of a contract being void are governed by the same law (Article 10(1)(e)).

“Where, however, a restitutionary claim arises because of invalidity of the parties' agreement at the time that it was made, the position seems to me to be inherently different. The mere fact that the agreement identified a governing law is unlikely in these circumstances to give a close or real connection to that governing law. On the contrary, in my view the invalidity of the parties' agreement at the time that it was made will ordinarily have the consequence that the suggested connection is unreal. The position seems to me in principle the same where a restitutionary claim arises because a party has a continuing right to assert the invalidity of the parties' agreement at the time that it was made, and exercises that right. The upshot is that ordinarily a suggestion of a connection with England, if solely based on what was said in the agreement, cannot be made good. The reason is that the party objecting to that suggestion is entitled to say that the suggestion depends upon a link which was invalid from the outset.”

“While I would not necessarily place the same weight as did DB on the technical survival of the ISDA Master Agreement, there is force in the submissions that: (i) that choice of law would retain weight under the Haugesund approach of adopting the putative applicable law to determine the civil law consequences of a lack of capacity on the validity of a contract; and (ii) the facts of this case are also distinguishable from Dexia because Dexia was an Italian bank, whereas DB acted through its London branch. The place of enrichment in this case would therefore also be England. Overall, therefore, despite the existence of certain ties to Italy, I would conclude that the closest and most real connection for the putative Transactions was with England.”

Article 8(1) of the Rome Convention recognises that where the issue arises as to the existence of an agreement which, if concluded, would be subject to English law by virtue of a choice of law, English law will be applied in determining whether or not a contract has been concluded. That reflects the importance attached to a putative applicable law, even when there is a dispute as to whether or not a contract was concluded.

On that basis, English law has been applied in this case to issues relating to the Transactions such as the consequences of Venice’s lack of capacity and whether the lack of actual authority on Mr Dei Rossi’s part is sufficient to render the Transactions void.

Those matters are sufficient to show that, even when the validity of the contract is in dispute, or it has been determined that the contract is void, the parties’ putative choice of English law is still legally significant.

Further, there is, at least, a logical connection between the system of law which decides that a contract is void (English law in this case), and the law to be applied in determining what the consequences of it being void are on the parties to the extent they had purported to perform it. I note that in Arab Bank Ltd v Barclays Bank (Dominions, Colonial and Overseas) [1953] 2 QB 527, 572, Jenkins LJ observed:

“An interesting argument was presented to us as to the local situation of the resuscitated claim, supposing such a claim to exist. As to that, I need only say that the claim as formulated by Sir Andrew was by definition situated outside Israel; but that if the cancellation of the contractual debt was brought about by Israeli law, it would at least be logical also to look to Israeli law for the consequences of such cancellation, and to regard any substituted obligation as the creature of that law, and consequently as situated in the country to whose law it owed its existence. It is, however, unnecessary in the view I take to give any decided answer to this hypothetical question, and I refrain from doing so.”

While the issue does not appear to have been raised directly in Haugesund, Aikens LJ appears to have assumed that English law governed the restitutionary claim in respect of a void contract which would have been governed by English law, and addressed the significance of the foreign statute to such a claim not on the basis that the case was being argued by reference to English law only as a matter of convenience but on the basis that English law was indeed applicable (see [97]-[100]).

Finally, the payments in question were made by Venice on the understanding that they were required by English law obligations, in discharge of English law debts, with the Banks having the same understanding in receiving them. The fact that the payments were made and received on the basis of assumed English law obligations is, to my mind, highly significant, it being the natural expectation in those circumstances that English law would apply to issues relating to security of receipt and rights of recovery.

“It is clear from the treatment of unjust enrichment claims in respect of payments made under wholly executed ultra vires swaps that the mere fact that the anticipated counter-performance has been received does not preclude a claim in unjust enrichment by the net payer based on the mistake as to the existence of the contract (Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council [1999] QB 215). This case can be seen as treating payments under void swap contracts as conditional in two respects: conditional on the receipt of counter-performance, but conditional also on the conclusion of a binding contract and the legal rights which would follow from that. I can see no objection in principle to the transfer of a benefit being subject to more than one condition, failure of any one of which will generate a claim in unjust enrichment. This analysis is supported by the editors of Goff and Jones (paras 13.14–13.15) and also by the Singapore Court of Appeal in Benzline Auto Pte Ltd v Supercars Lorinser Pte Ltd [2018] 1 SLR 239, para 52 in which Judith Prakash JA observed: ‘[Although] it is usual and convenient to refer to the basis of a transfer, the reality is that, as the learned authors of Goff & Jones observe at para 13-14, a transfer may have more than one basis.’”

“The decision in SFM still leaves some difficult questions. For instance, Foxton J accepted that a defence of change of position lies in response to a claim based on failure of an (express) condition; however, this position has been robustly criticised for rewriting the bargain between the parties. Unfortunately, Foxton J’s judgment had little to say about these concerns. Some resolution of this issue may be called for, particularly if there is merit in a generalised condition-based model (as is some consideration of the differences, if any, between express and implied conditions for the purposes of change of position).”

“As to whether the availability of a change of position defence should prevent engagement of the counter-restitution principle, according to the preceding analysis, this depends principally upon whether this defence applies to unjust enrichment claims premised upon a failure of condition. If the reason for restitution for failure of condition is the parties’ agreement that the claimant’s conferral of the relevant benefit was conditional, it is doubtful that a change of position defence should be available. To deny restitution for a failure of condition because the defendant changed its position would be inconsistent with this agreement: see Stevens (2018) 134 L.Q.R. 574 at 587. This also suggests that Foxton J.’s decision at first instance, that SFM had a change of position defence to the college’s restitutionary claim for hire payments already made, was incorrect because the basis for the college’s claim for restitution of these payments was failure of condition.”

“The College did not seek to argue that a defence of change of position was not open to SFM to the extent that its claim in unjust enrichment was premised on a failure of basis, no doubt recognising that the nature of the change of position relied upon in this case was expenditure directly incurred in preparation for the Contract (see the discussion in Goff and Jones, at paras 27-58 to 27-60).”

Those passages in Goff and Jones (9^th) provide:

“When money is paid to a recipient on an agreed basis, he knows that he may have to repay a like sum if the basis fails to materialise, suggesting that he cannot spend the money in the honest belief that the transferor had an unqualified intention to benefit him. So, for example, if a claimant pays a defendant money to build a house, and the defendant spends it on a holiday that he would not otherwise have bought, the law will almost certainly not permit him to rely on this fact in the event that the house is not built and the claimant sues to recover his money.

27-59

Goss v Chilcott was like this. The defendants borrowed money from the claimant under a void agreement, which was paid to a third party at the defendants’ request. This arrangement did not constitute a change of position because the defendants knew that if the third party failed to repay the money then the claimant would require the defendants to repay it themselves. This decision was affirmed and followed by the Court of Appeal in Haugesund Kommune v Depfa ACS Bank, where the defendant local authorities could not raise the defence in response to claims by a bank from which they had received money under void interest swap agreements, and which they had used to invest in financial instruments that declined in value.

An exception to this principle is that payments to meet preparatory expenses will constitute expenditure on which a defendant can rely: in BP Exploration Co (Libya) Ltd v Hunt (No 2) Robert Goff J held that the statutory allowance for such expenses given by the Law Reform (Frustrated Contracts) Act 1943, s.1(2), should be seen as a statutory example of the change of position defence. However, a defendant cannot invoke the defence if he spends money on materials which will not actually help him to perform his agreement. These were the facts of a New Zealand case, Saba Yachts Ltd v Fish Pacific Ltd, where the defendant commissioned plans for a boat that fell outside the specification of the boat which it had agreed to build for the claimant.”

It is generally accepted that where the recipient acquires the benefit on what appears to be an unconditional basis (for example a mistaken payment into the recipient’s bank account to which the recipient believes they are entitled), which causes the recipient to spend money it would not otherwise have spent, a defence of change of position will apply (ignoring any complications arising from surviving value). The example of the “innocent” recipient of a mistaken payment who, as a result, makes a gift to charity given by Lord Templeman in Lipkin Gorman, p.579 falls into this category.

Equally, where the benefit is acquired on a basis whereby it is to be repaid (e.g., money paid to the “borrower” under a void loan), it will be no answer to a claim for restitution that the recipient has spent the money. This was the position in Haugesund, in which the local authority had engaged in ultra vires swaps transactions, used the upfront receipt to make investments which had failed, and then sought to rely on those failed investments as giving rise to a change of position defence to the counterparty’s claim for restitution. As, on its own understanding of the transaction it thought it had entered into, the local authority was always going to have pay the amount received back with interest, whether the investments succeeded or failed (such that the payments were economically “conditional”, even on the transaction as it was believed to be), there was no good reason to afford the local authority a change of position defence: [124]-[126].

When money is paid to a recipient subject to a condition which the recipient knows has yet to be satisfied, and the recipient spends the money for their own purposes, the defence of change of position will not be available: e.g. the example in Goff and Jones, [27-58] of the builder who receives an upfront payment for building works who knows the payment is conditional on the work being done, spends the money on a holiday, and it then proves impossible for the work to be done (without the fault of either party). To similar effect see Professor Robert Stevens, “The Unjust Enrichment Disaster” (2018) 134 LQR 574, 587.

As noted at [397] above, there is support for the view that the outcome in the preceding example may be different if the sums received are expended for the purpose of the contract to be performed (although it may be possible to analyse these cases on the basis that the purpose of the “advance” payment was in part to put the recipient “in funds” to meet that preparatory expenditure).

Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890, 948-949 where Hobhouse J held that:

“There has been no alteration of the position of Westdeutsche since it received the sums paid to it by Islington. The change of position occurred … when [the bank] entered into [the hedging contract] … The contract was, as a legal transaction, wholly independent of Westdeutsche’s transaction with Islington. The supposed existence of the contract between Westdeutsche and Islington has provided the motive for Westdeutsche to enter into a contract with Morgan Grenfell, but that was all. Therefore, there has been no change of position of Westdeutsche relevant to any claim which Islington might have had against it. Thirdly, whilst it is presently correct that Westdeutsche as the floating rate payer under its contract with Morgan Grenfell is presently out of pocket, it does not follow that this will be the final outcome of that contract. While high interest rates have prevailed on the sterling market on London, the contract has been disadvantageous to the floating rate payer. If the situation becomes one where low interest rates prevail then the contract will become advantageous to the floating rate payer; Westdeutsche will start to be in a position where it receives payments rather than has to make them and it is perfectly possible this may fairly quickly extinguish and reverse the loss of £3 m. To assert that Westdeutsche will have made a loss through entering into the Morgan Grenfell contract is simply a speculation”.

South Tyneside MBC v Svenska International plc [1995] 1 All ER 545, 565, where (after referring to Hobhouse J’s decision) Clarke J held:

“In my judgment in circumstances such as these the bank is not entitled to rely upon the underlying validity of the transaction either in support of a plea of estoppel or in support of a defence of change of position. That is because the transaction is ultra vires and void. It is for that reason that in a case of this kind, save perhaps in exceptional circumstances, the defence of change of position is in principle confined to changes which take place after receipt of the money. Otherwise, the bank would in effect be relying upon the supposed validity of a void transaction”.

First, that the banks had committed themselves to the terms of the hedging swap in advance of the receipt.

Second, that in those circumstances it follows that banks would be founding the defence on the basis of the apparent validity of a void transaction with a public authority.

Third, that the banks’ decisions to enter into the hedging swaps was a wholly independent decision taken for their own purposes.

Fourth, the fact that it was not known whether or not the entry into the hedging transactions would, or would not, ultimately prove to be economically disadvantageous for the banks.

“It is true that, in the second case, the defendant relied on the payment being made to him in the future (as well as relying on such payment, when made, being a valid payment); but, provided that his change of position was in good faith, it should provide, pro tanto at least, a good defence because it would be inequitable to require the defendant to make restitution, or to make restitution in full.”

“It follows that the exclusion of anticipatory reliance in that case depended on the exceptional facts of the case; though it is right to record that the decision of Clarke J has been the subject of criticism—see, eg, Goff and Jones, Law of Restitution … pp 823–824.”

“The question of whether the Banks would ever receive any payments from Venice at the time of entry into the swaps was indeterminate: the market could have changed, and Venice could have been a net payee throughout. In that context, it cannot be said that the Banks were relying on receipt of any payment by Venice when entering into the back-to-back hedges; on the contrary, they were seeking to hedge the risk that they themselves might need to make payments”.

“(1) The defendant has a defence to the extent that—

(a)

the defendant’s position has changed as a consequence of, or in anticipatory reliance on, obtaining the benefit, and

(b)

the change is such that the defendant would be worse off by making restitution than if the defendant had not obtained, or relied in anticipation on obtaining, the benefit.

But the defendant does not have this defence if—

(a) the change of position—

(i) was made in bad faith, or

(ii) involved significant criminal illegality, or

(iii) constituted the taking a risk with loaned money, or

(b) the weight to be attached to the unjust factor is greater than that to be attached to the change of position (as, for example, where the unjust factor is the unlawful obtaining of a benefit by a public authority”.

“When a person receives a mistaken overpayment there are, even on the narrow view as to the scope of the defence, a variety of conscious decisions which may be made by the recipient in reliance on the overpayment. Some are simply decisions about expenditure of the receipt: the payee may decide to spend it on an asset which maintains its value, or on luxury goods with little second-hand value, or on a world cruise. He may use it to pay off debts. He may give it away. Or he may make some decision which involves no immediate expenditure, but is nevertheless causally linked to the receipt. Voluntarily giving up his job, at an age when it would not be easy to get new employment, is the most obvious example. Entering into a long term financial commitment (such as taking a flat at a high rent on a ten-year lease which would not be easy to dispose of) would be another example. The wide view adds further possibilities which do not depend on deliberate choices by the recipient.”

“even though he may still in fact have in his hands the monies paid to him or assets representing those monies (this point was not explored at trial), Mr Crimmin changed his position in a fundamental respect in good faith in reliance on his assumption (shared with Mr Smith and the company) that the agreement was valid and that the sums he received under it were validly paid to him. Had he realised that the agreement was invalid and the payments made under it were made by mistake, Mr Crimmin would obviously have wished to consider how his continuing interest in the company should be protected, either by his resuming his rights to protect himself as a quasi-partner in the business or by seeking the reformulation of the agreement so as to ensure that it and the payments to him were valid. These opportunities which were denied him cannot be restored to him. In my judgment, in these unusual circumstances, this was a change of position on the part of Mr Crimmin such as to fall within the scope of the defence of good faith change of position articulated by the House of Lords in Lipkin Gorman. Accordingly, whilst I hold that cl. B1 and associated provisions of the agreement were in fact void, I also hold that Mr Crimmin has a good defence to the claim for repayment of monies which is now made against him.”

“Change of position may apply as a pro tanto defence where the detriment can readily be quantified. This is not such a case. Contrary to the submissions of the appellant, change of position applies in this case as a complete defence to the appellant's claim.”

In the Scottish Equitable case, [45]-[47], Walker LJ observed:

“[45] I should record one further novel and ingenious argument addressed to us by Mr Moriarty (but generously attributed by him to his junior, Mr Handyside). That is that, since Lipkin Gorman , the defence of change of position pre-empts and disables the defence of estoppel by negativing detriment. Detriment must, it was correctly submitted, be judged at the time when the representor seeks to go back on his representation, since

‘… the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment.’

(Dixon J in Grundt v Great Boulder Pty Gold Mines (1938) 59 CLR 641 , 674–5, quoted in Spencer Bower and Turner, The Law Relating to Estoppel by Representation 3^rd ed (1977) pp.110–1).

[46]. The argument can be simply explained by an illustration in the form of a dialogue. A pays £1000 to B, representing to him “I have carefully checked all the figures and this is all yours”. B spends £250 on a party and puts £750 in the bank. A discovers that he has made a mistake and owed B nothing. He learns that B has spent £250 and he asks B to repay £750.

B: “You are estopped by your representation on which I have acted to my detriment.”

A: “You have not acted to your detriment. You have had a good party, and at my expense, because I cannot recover the £250 back from you.”

The facts that B has spent £250 in an enjoyable way, and that A readily limits his claim to £750, put the argument in its most attractive form. But it seems to have some validity even if B had lost £250 on a bad investment, and A began by suing him for £1000.

[47]. I find this argument not only ingenious but also convincing. If I prefer to base my conclusion primarily on the grounds relied on by the judge it is partly because the argument is novel and appears not to have been considered by any of the distinguished commentators interested in this area of the law. But at present I do not see how the argument could be refuted.”

That approach was commented upon with apparent approval by Clarke LJ in National Westminster Bank plc v Somer International (UK) Limited [2001] EWCA Civ 970, [61]:

“I am not sure that this approach is markedly different from that described by Robert Walker LJ in paragraphs 45 to 47 of his judgment in  Scottish Equitable  and referred to as a ‘novel and ingenious point’. If, as Dixon J put it in  Grundt v Great Boulder Gold Mines  (1938) 59 CLR at pages 674-5, and as Robert Walker LJ said was correct in paragraph 45, detriment must be judged when the representee seeks to go back on his representation, the recipient will not have acted to his detriment if he is entitled to keep the part of the money that he has spent but not the rest. Provided that he is entitled to keep the amount spent, it is likely (subject to the circumstances of the particular case) to be unconscionable to allow him to keep the rest, in which event he should not in principle be entitled to do so. As I see it, the application of what may be called the unconscionability test does not involve the exercise of a discretion but provides a principled approach to the problem in a case of this kind.”

The approach was also approved by French CJ in the High Court of Australia in the Australian Financial Services case, [23] when he observed that “the requirement that detriment be assessed at the time of demand for repayment is justified by reference to the analogous requirement in estoppel explained by Dixon J in Grundt v Great Boulder Pty Gold Mines Ltd.”

“Now where, as for example in a case of a breach by a seller in failing to deliver the goods on the due date, there is an available market and advantage is not taken of the available market then, generally speaking, the decision by the buyer not to take advantage of the available market is an independent decision, independent of the breach, made by the buyer on his assessment of the market. It is perfectly true that his decision is made in the context of a pre-existing breach of contract by the seller, in the sense that the breach of contract provided the occasion upon which the buyer makes his market judgment; but even if there had been no breach at all it would have still been possible for the buyer to have made the same decision. For example, if the goods had been delivered on the due date he could, if he had so wished, have sold the goods on the date of delivery and then have bought in comparable goods at a later date. The position was made clear by Lord Wrenbury when he delivered the advice of the Privy Council in the case of Jamal v. Moolla Dawood Sons & Co., [1916] 1 A.C. 175. That was a case concerned with a contract for the sale of shares and not with a contract for sale of goods, and the breach was a breach by the buyer and not by the seller. But in that context Lord Wrenbury said (at p. 179):

‘. . . If the seller retains the shares after the breach, the speculation as to the way the market will subsequently go is the speculation of the seller, not of the buyer; the seller cannot recover from the buyer loss below the market price at the date of the breach if the market falls, nor is he liable to the purchaser for the profit if the market rises.’

So, in that situation, generally speaking, the decision not to take advantage of the available market is the independent decision of the innocent party, independent of the wrongdoing which has taken place. It takes place in the context of a pre-existing wrong but it does not, to use Viscount Haldane's expression, ‘arise out of the transaction’."

issues of quantification which did not form part of this trial; and

the issue of whether any different treatment attaches to those payments made after Venice sent its letters of 10 December 2020 stating that any payments were being made without prejudice to its contentions that the swaps were void (which might be thought to raise the issue discussed at [395] to [396] above particularly acutely).

“(1) … where in the case of any action for which a period of limitation is prescribed by this Act, … —

(c) the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the … mistake … or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent.”

“Taking stock of the discussion so far, the position can be summarised as follows:

(1) Limitation periods set a time limit for issuing a claim, which normally begins to run when the cause of action accrues. They apply whether the substance of the claim is disputed or not. They apply to claims regardless of whether there is in truth a well-founded cause of action.

(2) Section 32(1) postpones the running of time beyond the date when the cause of action accrues, in cases where the claimant cannot reasonably be expected to know at that time the circumstances giving rise to the cause of action, by reason of fraud, concealment or mistake. Its effect is that the limitation period commences not on the date when the cause of action accrues, but on the date when the claimant discovers, or could with reasonable diligence discover, the fraud, concealment or mistake.

(3) Consistently with (1) above, section 32(1) cannot be intended to postpone the commencement of the limitation period until the claimant discovers, or could discover, that his claim is certain to succeed.

(4) Consistently with (1) above, section 32(1) cannot be intended to postpone the commencement of the limitation period until the proceedings have been completed.

(5) In tying the date of “discoverability” of a mistake of law in section 32(1) to the date when “the truth” as to whether the claimant has a well-founded cause of action is established by a judicial decision, the decision in Deutsche Morgan Grenfell [2007] 1 AC 558 contravenes (3) above, and is therefore inconsistent also with (1) above.

(6) In tying the date of discoverability to the date of a judicial decision, with the consequence that the limitation period for issuing a claim may not begin to run until the proceedings have been completed, the decision in Deutsche Morgan Grenfell also contravenes (4) above, and is for that reason also inconsistent with (1) above.

(7) Tying the date of discoverability to the date of a decision by a court of final jurisdiction, as the House of Lords appear to have done in Deutsche Morgan Grenfell and as the Court of Appeal held in FII (CA) 2, compounds the mistake ….

…

(13) The purpose of the postponement effected by section 32(1) is to ensure that the claimant is not disadvantaged, so far as limitation is concerned, by reason of being unaware of the circumstances giving rise to his cause of action as a result of fraud, concealment or mistake. That purpose is achieved, where the ingredients of the cause of action include his having made a mistake of law, if time runs from the point in time when he knows, or could with reasonable diligence know, that he made such a mistake “with sufficient confidence to justify embarking on the preliminaries to the issue of a writ, such as submitting a claim to the proposed defendant, taking advice and collecting evidence”; or, as Lord Brown put it in Deutsche Morgan Grenfell, he discovers or could with reasonable diligence discover his mistake in the sense of recognising that a worthwhile claim arises.”

England and Wales is the contractual forum in which Venice’s claims had to be brought.

A noticeable feature of this case, therefore, is that the commencement of proceedings in the contractual forum could only challenge the position under Italian law as a matter of fact, rather than by (for example) seeking to take the point to the Supreme Court to determine the position under English law.

So far as the likely position in English proceedings is concerned as noted at [381] above, as late as 2015, Walker J rejected very similar arguments in the Prato case, and an appeal against the Article 119 aspects of that decision failed in 2017, both decisions not treating the Bologna Court of Appeal decision in Cattolica as sufficient. Those findings could have been given the status of prima facie evidence in any English proceedings (see [165(ii)), and in any event are likely to have strongly influenced any English judge. Indeed, given the terms of the Court of Appeal judgment quoted at [162], it is difficult to see how the claims would have been viable in the absence of a decision at a higher level.

I have already explained at [276] my reasons for concluding that the decision of the Supreme Court in Cattolica represented a fundamental change in the interpretation of the relevant legislative and regulatory provisions.

For those reasons I am satisfied that, exercising reasonable diligence, Venice could not have discovered that it had a “worthwhile claim” prior to the Cattolica decision in the Supreme Court.

It follows that none of Venice’s claims for restitution are time-barred.

The Banks owed Venice contractual and non-contractual advisory duties in relation to the entry into the Transactions.

The Transactions were not suitable for Venice, and the Banks were thereby in breach of those contractual and non-contractual duties.

Venice suffered loss as a result.

The allegation that they were unsuitable because they were unlawful as a matter of Italian law (the Illegality Suitability Issue).

The allegation that they were unsuitable because of various features of the Transactions, including the negative MTM arising from the fixing of the terms on a basis which compensated the Banks for meeting the costs of winding up the Bear Stearns IRS and the effect on the economics of the Transactions which followed from that (the Negative MTM Suitability Issue).

It was accepted that if the Banks had breached non-contractual obligations in relation to the Illegality Suitability Issue, then the appropriate counterfactual for the assessment of damages was one in which Venice had not entered into the Transactions, it being accepted that if Venice had been told that it would be unlawful for it to enter into the Transactions, it would not have done so.

By contrast, if the Banks were found to be in breach of a non-contractual obligation in relation to the Negative MTM Suitability Issue, there was no such agreement, and Venice (for the reasons explained at [432] above) had adduced no evidence as to what it would have done in this scenario.

The relevant non-contractual obligations were not governed by Italian law, as Venice’s counterclaim assumes, but by English law.

The Banks assumed no non-contractual duties to Venice as to the suitability of the Transactions.

The Transactions were in fact suitable.

Venice has failed to establish causation.

The counterclaim is time-barred.

Venice has established a breach of the assumed duty so far as the Illegality Suitability Issue is concerned?

Venice has established that the assumed breach of duty in relation to the Negative MTM Suitability Issue has caused it loss?; and

Venice’s claims are time-barred?

any obligation on the part of a bank to assess suitability of the Transactions did not extend to determining whether it was lawful for Venice to enter into the Transactions; and in any event

if there was such an obligation, it was at best one which required the Banks to act diligently, and it could not be said that the view that it was lawful for Venice to enter into the Transactions was one which could not diligently have been held in December 2007.

Both the Banks (through Clifford Chance) and Venice (through Beltramo) had access to Italian law advice when the Transactions were under consideration, and there is nothing to suggest advice was or ought reasonably to have been given at that time that the Transactions were unlawful.

So far as Decree 389 and the 2004 MEF Circular are concerned, the view that there did not need to be an equivalence between the MTMs of the floor and cap in a collar transaction was clearly one which could reasonably be held in 2007, it being the view reached by Christopher Clarke LJ in 2014, Mr Justice Walker in 2015 and Mrs Justice Cockerill in 2021, and by Professor Napolitano before Walker J and Professor Gentili before me.

I was shown no material which suggested that there was any court decision to the contrary effect at the time when the Transactions were entered into, still less material establishing that the contrary view could not reasonably have been held.

So far as the various matters relating to Article 119, the Speculation Argument and the Article 42(2)(i) TUEL Argument are concerned, it is Venice’s own case that “Venice did not know that the Swaps were prohibited by Italian law and/or that Mr Dei Rossi lacked actual authority to enter into them until Cattolica”. Venice has also asserted in its Defence and Counterclaim that “Venice could not have known prior to Cattolica that the Transactions and Transaction Documents were not valid and enforceable in accordance with their terms”. I see no reason for concluding that the Banks ought to have been in a different position.

Professor Alibrandi accepted that the general rule as a matter of Italian law is that Venice as the claimant would have the burden of proving the causal link between breach and loss, and that general rule applies in cases of damages brought by an investor against an intermediary under TUF. Thus, Supreme Court Decision No 2350/2020 confirmed that the investor “has the burden of proving ... the financial loss resulting from the investment made and the causal link between the failure to comply and the alleged damage”. Professor Alibrandi also observed that this rule (that the burden of proving causation lay on the claimant) was the one “usually applied” where the investor sought damages for breach of a TUF obligation.

Professor Alibrandi noted that “in some cases” the Supreme Court had adopted a “less strict” approach and presumed loss. In particular, she referred to Supreme Court Decision No 33596/2021, in which the intermediary was in breach of a duty to provide information to the client. The Supreme Court noted that

“in matters of financial intermediation, the information obligations incumbent on the financial intermediary are designed to encourage genuinely informed choices on the part of the investor, there being therefore a legal presumption as to the existence of a causal link between failure to provide information and damage investor, in relation to which the intermediary may offer proof to the contrary...”.

Professor Alibrandi also referred, without real discussion, to a case in which a similar approach had been adopted when the adviser was acting in a position of conflict of interest. The scope or rationale of any such exception was not explained, and it does not appear to me, at least, that Professor Alibrandi was seeking to support a wider principle of law that applied in suitability cases. Certainly, Professor Alibrandi did not point to any case in which this presumption had been applied in any suitability case.

It was Professor Gentili’s evidence that the burden of proof lay on Venice to establish causation. He was in agreement with Professor Alibrandi as to the general rule as referred to at i) but did not accept that there was any established exception to that principle in information cases. The question of whether there was any wider exception does not appear to have been touched on during the experts’ discussions.

Given the undisputed nature of the general principle, the tentative terms in which Professor Alibrandi referred to the fact that it had not always been applied, and the absence of any case reversing the burden of proof in a suitability case, I have not been persuaded that there is any principle of Italian law which would relieve Venice of its obligation to establish causation. Further, there is clearly a difference between a failure to provide the client with information to which the client is entitled for the purpose of forming its opinion, and a failure to offer advice to the client that in the intermediary’s view, some aspects of the transaction made it unsuitable. In this latter context, the client may well have its own view about those particular features, and a desire to enter into a transaction which contains them. It is also understandable that a court might adopt a more favourable approach so far as the client is concerned when the adviser acts in a position of conflict of interest (English law, at least, laying some emphasis on the importance of clear rules with deterrent effect in this context). However, formulating a further exception in suitability cases would run into the difficulty of how this could be done without substantially eroding what is accepted to be the general rule.

I note the conclusion which I have reached is broadly consistent with that reached by Walker J in Prato, [2016] EWHC 2824 (Comm), [371]-[373].

in relation to the Illegality Suitability Issue, because there was no breach; and

in relation to the Negative MTM Suitability Issue, because there was no causation.

There is a 10-year limitation period which applies in the absence of any contrary provision (Article 2946 of the ICC). It is common ground that this applies to claims in contract.

There is a 5-year limitation period for claims for damages arising from an unlawful act (which I shall refer to as torts) (Article 2947 of the ICC).

The limitation period runs from the date on which the claimant was first able to assert its right (pursuant to ICC Article 2935).

That date will be the later of: (i) when damage occurred, or (ii) when the claimant was in a position, using ordinary diligence, to be
aware that it had suffered damage.

First, Venice contends that it is the 10-year limitation period rather than the 5-year tort limitation period which applies to claims for damages under the TUF.

Second, Venice contends that time does not run for all its claims from the date when it was aware using ordinary diligence that it had suffered damage, but that a new and separate claim arose each time it made a payment to the Banks under the Transactions.

Limitation period for damages (pre-contractual liability) – As better clarified above, the view traditionally taken by Italian case law and legal scholars is that pre-contractual liability qualifies as tort (ex delicto) liability, since it is not linked to the breach of existing contractual obligations.

It follows from that doctrine that the right to compensation for damage under Articles 1337 and 1338 is subject to the five-year limitation period laid down in the above-mentioned Article 2947 of the Italian Civil Code, (see the decision of the Court of Cassation No. 4051/1990; see also the Decision No. 5371/1987).

As explained in paragraph 197 above, the Court of Cassation has recently taken a different approach in Decision No. 14188/2016 and assimilated the pre-contractual liability provided for by Article 1337 and 1338 to the contractual liability and stated that the relating action for damages is subject to the general ten-year limitation period provided for by Article 2946 mentioned above”.

Article 1337 is concerned with “negotiations and pre-contractual liability” and provides that “the parties, in the conduct of negotiations and the formation of the contract, shall behave according to good faith”.

Article 1338 is concerned with “Knowledge of causes of invalidity” and provides that “the party who, knowing or who should know of the existence of a cause of invalidity of the contract did not inform the other party of this, is required to compensate the damage suffered by this party for having trusted, without its fault, in the validity of the contract.”

Court of Venice Decision No 696/2022, a decision dealing with a claim in restitution referred to be the experts for that purpose; and

a decision of the Court of Auditors of Lazio dated 11 April 2022 which did not form part of the expert evidence (and which only goes so far as to say that time runs from the first payment, rather than there being a separate limitation period for each payment, which would not assist Venice in any event).

I am satisfied that the Banks have no liability in contract to Venice so far as the suitability of the Transactions is concerned.

Any claim on Venice’s part against the Banks for breach of contract is time-barred in any event.

Venice lacked capacity to enter into the Transactions on the basis of the Speculation and Indebtedness Arguments, with the result that they are void and unenforceable as a matter of English law.

Venice’s challenges to the Transactions based on the Article 42(2)(i) TUEL Argument and breach of mandatory Italian law fail.

The Banks’ arguments based on estoppel, breach of contract, misrepresentation or misstatement, Article 1338 of the ICC and the indemnity obligation in the Mandate Agreement fail.

Venice is entitled to restitution of the amounts paid to the Banks under the Transactions, but the Banks are in principle entitled to rely on a defence of change of position in respect of payments made under the “back-to-back” Hedging Swaps, subject to the reservations at [424] above.

Venice’s alternative claim for damages for breach of non-contractual obligations fails.