Dexia Crediop SPA v Comune Di Prato, Court of Appeal - Civil Division, June 15, 2017, [2017] EWCA Civ 428

Resolution Date:June 15, 2017
Issuing Organization:Civil Division
Actores:Dexia Crediop SPA v Comune Di Prato

Neutral Citation Number: [2017] EWCA Civ 428

Case No: A3/2015/2385, A3/2017/0315, A3/2017/0320, A3/2017/0324, A3/2015/2385(B), A3/2015/2385(E), A3/2017/0324(A) & A3/2017/0320(A)






Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 15/06/2017






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Between :

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Mr Richard Handyside QC & Mr Rupert Allen (instructed by Allen & Overy LLP) for the Appellant

Mr Jonathan Davies-Jones QC & Mr Christopher Burdin (instructed by Seddons) for the Respondent

Hearing dates: 8th, 9th, 10th, 11th, 12th & 15th May 2017

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  1. In the Palazzo Comunale in the Tuscan town of Prato, there hangs a magnificent portrait by Alessandro Allori of Francesco Datini, better known to English visitors since the publication of Iris Origo's book as the Merchant of Prato. He is depicted in an overgarment of scarlet cloth, the commodity for which Prato was well-known (and indeed pre-eminent) in the Middle Ages. He was himself an elected Councillor of the Comune and is usually regarded as the founder of the city's prosperity. His statue stands outside the Palazzo holding a sheaf of bills of exchange. On the first page of each of his ledgers were the words ``In the name of God and of profit'', but he left his fortune to the city rather than the church. The Comune di Prato (``Prato'') is still in existence as an Italian local authority but one feels that the facts of this appeal would cause the Merchant some dismay, because from 1996 onwards its finances had become under considerable pressure. As at 31st December 2001 its total borrowing stood at around €111m. 88% of that figure was at a fixed interest rate whilst the remaining 12% was at a variable rate.

  2. Concerned at its level of debt, Prato sought ways of managing its liabilities. On 24th April 2002 it issued a tender notice for the appointment of a financial adviser, and on 22nd May 2002 it set up a technical committee to consider and evaluate the seven tenders received. This committee consisted of 3 employees of Prato, Ms Graziella de Castelli, who was Prato's manager of Financial Resources between 1996 and 2007, Ms Rappuoli and Ms Belli and 3 external advisers who had drafted the tender notice, Professor Nigro and Professor Bompani (both Professors of economics) and a former senior banker in the person of Signor D'Agliana. One of the tenders came from Dexia Crediop S.p.A. (``Dexia'') an Italian bank; in that tender Dexia recommended the use of derivative transactions for hedging against interest rate risk. The external members of the committee recommended that such transactions should not be for longer than 5 years and Dexia revised its proposal accordingly. By resolution of 25th July 2002 the committee decided to recommend the appointment of Dexia as Prato's adviser and this was duly done.

  3. On 23rd November 2002 Dexia and Prato signed an ISDA Master Agreement the terms of which were incorporated into the subsequent swap contracts.

  4. Interest rate swap contracts were then entered into between Dexia and Prato as a method of restructuring Prato's debt. The first swap was entered into by Dexia's acceptance of Prato's irrevocable proposal on 4th December 2002. Dexia paid €165,000 to Prato as a premium and entered into a back-to-back hedging agreement with an associated company in France.

  5. Swap 1 was terminated by Swap 2 which was agreed by Dexia's acceptance of Prato's irrevocable proposal on 6th August 2003. On the same day, Swap 3 was also entered into. Dexia entered back-to-back contracts with Deutsche Bank and Morgan Stanley in respect of these swaps.

  6. On 30th December 2004 Dexia accepted irrevocable proposals to enter into Swaps 4 and 5 which would complement a bond issue from Prato, all of those bonds having been acquired by Dexia in private placements. Swaps 4 and 5 unwound Swap 2. Dexia entered back-to-back agreements with Deutsche Bank in respect of these swaps.

  7. In the early part of 2006 Prato became liable to pay sums due under Swap 3 and asked Dexia for assistance in restructuring that transaction. In June 2006 there was email communication between them and on 14th June there was a meeting at which a proposed bond and swap restructuring was approved.

  8. On 29th June 2006 Dexia accepted Prato's irrevocable proposal of the previous day to enter into Swap 6 which had the effect of cancelling all other existing swaps, namely Swaps 3, 4 and 5. In a document sent by Dexia to Prato on 17th October 2007 the mark to market (``MTM'') value to Prato of Swap 6 was said to be negative €5.205m.

  9. From Prato's point of view, all went well with Swap 6 until June 2009, when for the first time, as a result of the 2008 financial crisis, Prato had to make a payment to Dexia. It made payments due in December 2009 and June 2010 but made no further payments. On 31st December 2010 Prato purported to exercise its rights to administrative self-redress by annulling the resolution to enter Swap 6 and applied (unsuccessfully) to the Regional Administrative Court for Tuscany to have Swap 6 declared invalid.

  10. When it became clear that Prato would make no further payments, Dexia started proceedings in England. The terms of Swap 6, like the other swaps, incorporated the ISDA Master Agreement which contained an English law and jurisdiction clause.

  11. On 25th June 2015 Walker J handed down a judgment which established that, although Prato had the capacity in Italian law to enter into the swaps, it had a valid Italian law defence to Dexia's claim under Article 30 of a legislative decree (58 of 1998) called Testo Unico della Finanza (``TUF'') which provided that ``offsite'' contracts with a financial service provider had to give the investor a right to withdraw within 7 days of execution. On 10th November 2016 Walker J handed down a second judgment in which he dealt with other defences of Prato, as well as a claim and counterclaim in restitution and regulatory law counterclaims brought by Prato.

  12. In the result, although the substantive claims and counterclaim failed, both parties had successful restitutionary claims against each other. Setting off those claims, Dexia has been ordered to pay €327,680.95 to Prato.

    Structure of the claims and the responses to them

  13. Dexia's primary claim is for money owing under Swap 6 on the basis that Prato has failed to meet its obligations since 31st December 2010 in relation to that agreement.

  14. In defence, Prato relies on provisions of Italian law, some of which only apply if Article 3(3) of the Rome Convention (relating to ``mandatory rules'' which apply notwithstanding the parties' choice of English law), is engaged and some of which are available independently of that finding. The capacity defences (or, as the judge called them, the local government law defences) are available to Prato regardless of the choice of English law, because it is agreed that the question whether Prato has capacity to enter into the swap contracts is governed by Italian law.

  15. These capacity defences are based on:-

    1) Article 119 of the Italian Constitution which contains a provision that local government bodies such as Prato may resort to ``indebtedness only as a means of funding investments''.

    2) Article 41 of Law 448/2001: This provision turns on both the question whether it only applies to new debt and on an analysis of the concept of ``convenienza economica''. Local authorities can convert loans ``under refinancing conditions that allow a reduction of the financial value of the total liabilities to be paid by the bodies themselves, net of fees ...''

  16. The other defences, which the judge called financial regulatory and civil law defences (which we will just call ``financial defences''), only apply if Article 3(3) of the Rome Convention requires the application of mandatory rules of Italian law. The potential candidates are:-

    1) Article 30 TUF which invalidates contracts resulting from ``offsite offers'' if the contract does not state that the investor (i.e. Prato) has a 7 day right of withdrawal from the commencement date of the agreement.

    2) Article 32 TUF which deals with ``distance marketing techniques'', and applies the same right of withdrawal to contracts made by such distance marketing techniques.

    3) Article 23.1 TUF and Article 30 CR (the Consob Regulations): these combined provisions lay down formal requirements relating to other contents of contracts made with financial service providers.

  17. If the swaps are invalidated by any of the defences, the claims fail but there is a claim in restitution by both parties.

  18. But in addition, Prato has counterclaims for breaches of the provisions of the TUF and Article 41 referred to above. Dexia concedes that claims for damages for these alleged breaches would be governed by Italian law because they are claims in tort for breach of statutory duty.

    The First Judgment

  19. In this judgment Walker J considered (among many other matters) Dexia's primary claim for sums due under Swap 6 and dealt with Prato's local government law defences and also the obligation under Article 30 TUF to provide for the seven day right of withdrawal in contracts executed offsite.

  20. He concluded that none of the local government law defences succeeded. With regards to Article 119 of the Italian Constitution, he concluded that the word ``indebtedness'', as relevantly defined in paragraph 17 of Article 3 of Law 350/2003 did not apply to the swap agreements entered into between the parties in this case.

  21. With regard to Article 41 of Law 448/2001, the judge said that the law only bore on...

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