LONDON, June 15 (IFR) - London's Court of Appeal has ruled
that interest rate swaps entered into between Dexia Crediop and
Italian local authority Comune di Prato between 2002 and 2006
were valid and binding, enabling Dexia to recover missed
payments associated with the trade.
The decision overturns a 2015 High Court ruling that allowed
local Italian laws to invalidate the English law swap agreement,
deeming the swaps to be null and void.
The ruling will also strengthen the international
recognition of the ISDA Master Agreement as a derivatives
governance tool, possibly setting a precedent for similar cases
that have used local laws to invalidate the governing law of
The original ruling said that Dexia failed to inform the
municipality of its right to cancel the transactions during a
seven-day cooling off period - a mandatory provision under the
The Court of Appeal found in favour of Dexia, ruling that
Article 3(3) of the Rome Convention, which states that the
choice of governing law of a contract should not prejudice the
application of mandatory local laws, did not apply given the
ISDA Master Agreement underpinning the trades.
Dexia also said that it entered into back-to-back hedges
with banks outside of Italy in connection with the swaps, using
the same documentation.
According to lawyers at Allen & Overy and Italian law firm
BonelliErede, representing Dexia, the landmark ruling could be
significant for similar litigations involving Italian local
authorities and financial institutions that used "lack of
capacity" arguments to void swaps obligations.
"The decision is of significance to any financial
institution facing allegations of lack of capacity or defences
based on local mandatory laws," Allen & Overy partner James
Partridge said in a statement.
"This decision further confirms the court’s approach to the
scope of Article 3(3), emphasising that swaps entered into on
ISDA form documentation as part of a wider chain of back-to-back
transactions are to be regarded as taking place in a market
which is inherently international.”
The case refers to the last of six swaps that Prato entered
into with Dexia between 2002 and 2006 as part of a wider debt
restructuring. Prato defaulted on the final swap - an interest
rate collar - in 2010. As interest rates fell to historic lows
in the wake of the global financial crisis, the floor payable by
Prato exceeded prevailing market rates.
Following the payment default, Dexia brought a claim against
the local authority, seeking to recover €6.5m that was due to be
paid on the swap up to the 2013 maturity.
The ruling follows the acquittal of Dexia Crediop and its
executive Riccardo Sommavilla in the criminal dispute over the
same matter before the Court of Prato that concluded on May 31.
(Reporting by Helen Bartholomew)