Legal development

Banca Intesa and another -v- Commune di Venezia – Court of Appeal overrules first instance decision and finds swaps valid

Insight Hero Image

    On 13 December 2023, the English Court of Appeal handed down its decision in the eagerly anticipated appeal of Banca Intesa Sanpaolo SPA & Anor v Comune Di Venezia [2022] EWHC 2586 (Comm).

    The Banks succeeded on two Grounds of appeal, the effect being that the relevant interest rate swap transactions under a 1992 English law ISDA Master Agreement are valid and binding. This reversed the first instance decision.


    In 2007, Banca Intesa Sanpaolo and Dexia (together, the Banks) and the Commune Di Venezia (Venice) entered into interest rate swap transactions (the swaps) under a 1992 English law ISDA Master Agreement (the Master Agreement).

    The swaps were issued in connection with a 20-year floating rate bond issued by Venice in December 2002 (Rialto Bond). Around the same time, Venice entered an interest rate swap with Bear Stearns (Bear Stearns Swap) for the same notional amount as the Rialto Bond, to hedge its interest rate exposure.  Various swap restructurings culminated in December 2007, when the Bear Stearns Swap was novated to the Banks. As part of the novation, the Banks agreed to pay to Bear Stearns novation fees reflecting the mark-to-market (MTM) value of the swap. The terms of the swap were modified, including by rolling the MTM into, and adjusting the terms of, the new swap. As a result, the restructured swap had a significant positive MTM in the Banks’ favour.  In order to hedge the risk of the new swap, the Banks entered into back-to-back swaps with two other banks.

    In 2008, Venice received a letter from the City Council of Venice which queried whether the swaps were binding and/or could be cancelled on the basis that they were speculative. Then, in 2009 and 2010, a number of disputes concerning Italian local authorities which had entered into interest rate swaps under English law came before the English Commercial Court (most significantly the Prato case). 

    Venice continued to pay sums which fell due under the swaps. However, in June 2019, Venice commenced proceedings against the Banks in Italy claiming damages for breach of contractual and non-contractual advisory duties in relation to the swaps. Those proceedings are ongoing. 

    In December 2020, Venice sent letters to the Banks stating that it would continue to make the payments on the swaps, but without an admission of the validity of the swaps.

    First instance

    In August 2019, the Banks brought proceedings against Venice in the English Commercial Court, seeking declarations that the swaps were valid and binding. The Banks claimed in the alternative that if the swaps were not valid and binding, Venice was in breach of contractual duties or liable in respect of various misrepresentations and/or misstatements, for which they claimed damages.

    For its part, Venice made three claims:

    1. Unjust enrichment claim: Venice sought declarations that the swaps were not valid and binding because its entry into the swaps contravened provisions of Italian law. On that basis, Venice claimed that it was entitled to consequential relief in unjust enrichment by way of restitution of the net amount it had paid to the Banks during the life of the swaps.
    2. First alternative restitution claim: Venice separately argued that the swaps breached mandatory rules of Italian law for the purposes of Article 3(3) of the Rome Convention on the Law Applicable to Contractual Obligations 1980 (the Rome Convention). As a result, they said that the transactions were void and/or unenforceable. Based on these claims, Venice again claimed restitution of the net amounts paid under the swaps to date.
    3. Second alternative restitution claim: Venice further alleged that, if the swaps were valid and binding, the Banks had owed Venice a non-contractual advisory duty to assess the suitability of the swaps, which was breached, and Venice had suffered loss as a result.

    The swaps themselves were governed by English law, but whether Venice had capacity to enter into the swaps was governed by Italian law.

    First instance decision – swaps void

    The Court considered expert evidence on Italian law and determined that the swaps breached Italian law because they involved impermissible elements of speculation and indebtedness. Therefore, Venice lacked capacity to enter into the swaps, rendering them void and unenforceable under English law. As such, Venice was entitled to restitution of the amounts paid to the Banks under the swaps.

    As part of their case, the Banks made a number of claims, including:

    1. Contractual estoppel: The Banks argued that Venice was estopped from contending that the swaps were void because of representations made under the Master Agreement. These included a representation that Venice (i) had the power to enter into the swaps; (ii) had the power to perform its obligations under the swaps; and (iii) had taken all necessary action to authorise execution of the swaps and performance thereunder.

      Whilst the court determined that this was a matter of Italian law, no evidence was provided as to the Italian legal position, so the question was decided by reference to English law. The Court did not accept that a local authority, which lacked capacity to enter into speculative derivatives, could be estopped from contending that the single transaction in issue was speculative. That amounted to a promise that it had the capacity it lacked. 
    2. Single agreement: The Banks argued that the Master Agreement was a separate contract to other contracts governing the swaps, so, even if the other contracts were void and unenforceable, this did not extend to the Master Agreement and gave rise to an estoppel. The Court rejected this argument and held that the Master Agreement and the other contracts were one single contract because they were entered into at the same time and for the same purpose. 
    3. Misrepresentation: The Banks also advanced claims for damages against Venice under (a) section 2 of the Misrepresentation Act 1967; and (b) in the tort of negligent misstatement. The Court reached the following conclusions:

      (a) in the light of Court's conclusion that the swaps were void, the Misrepresentation Act 1967 had no application; and

      (b) on the basis of the law as it was reasonably understood at the time of transacting, even if Venice did owe the Banks a duty of care, it did not act negligently.

    4. Change of defence position: The Banks argued that, as they had entered into back-to-back swaps with two other banks to hedge the risk of the swaps with Venice, they had had to make substantial payments, which had detrimentally affected their position.

    Venice argued that, since the change of position (i.e. the entry into the hedges) had occurred before receipt of payments from Venice under the swaps, and the payments made under the back-to-back hedges were made because of the legal liability to do so arising under those hedges, the Banks' decisions to enter into the hedging swaps could not be said to be in reliance on the receipt of the payments by Venice.

    The Court elected not to follow two first instance authorities1 which it was said would have been fatal to the Banks' argument. In both of those cases, it was held that the defence of change of position would not ordinarily be available in respect of changes made before receipt of payment. Foxton J said that he would "leave it to the inevitable appeal" to determine whether his decision was correct.

    In the event, the Court allowed the Banks’ change of defence in principle, noting that even though the Banks' decision to enter into the back-to-back hedges occurred prior to receiving any payment from Venice, the decision was made in anticipation of payment from Venice and the purpose of this was to hedge the Banks' liabilities under the swaps. The Court held over two issues: those of quantification; and whether there might be a distinction for 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.

    Appeal decision – swaps valid

    The Banks pursued five Grounds of appeal:

    1. The judge wrongly held that the swaps were "speculative" under Italian Law;
    2. The judge wrongly held that the swaps involved the payment of an “upfront” fee (the novation fees), and thus “recourse to indebtedness” otherwise than “for the purpose of financing investment expenditure” within the meaning of Article 119(6) of the Italian Constitution;
    3. If Grounds 1 and 2 were to fail, the judge wrongly held that the Italian law rules as to speculation and indebtedness (as explained in Banca Nazionale del Lavora SpA v Comune di Cattolica (2020) (Cattolica)) were properly characterised under English law as limits on Venice’s capacity;
    4. If Grounds 1 to 3 were to fail, the judge's decision to apply Cattolica to the swaps was wrong because the development of Italian law in Cattolica was not reasonably foreseeable as at the date of the swaps, and thus constituted a retrospective change of law.  (Permission for this Ground was not granted ahead of the hearing, rather permission was considered on a rolled-up basis at the hearing.); and
    5. If, contrary to the preceding Grounds, the Court were to uphold the judge’s conclusion that the swaps were void, the judge wrongly held that, by reason of section 32(1)(c) of the Limitation Act 1980, Venice’s claims in restitution for payments made more than six years prior to issue of the claim form were not time barred.

     Venice also raised two Grounds of appeal: 

    1. The judge was wrong to find that Venice's counterclaim for restitution was governed by English, as opposed to Italian, law; and
    2. The judge was wrong to find that English law in principle affords a change of position defence to the Banks.

    The Court of Appeal handed down its judgment on 23 December 2023. Sir Julian Flaux C (with Lord Justice Males and Lady Justice Falk agreeing) held that the Banks' appeal succeeded on Grounds 1 and 2, the effect being that the swaps were held to be valid and binding. 

    Although it was not necessary to decide Venice's appeal, the Court noted (strictly obiter) that:  the Banks' appeal on Ground 3 would have been dismissed; the Banks were refused permission to appeal on Ground 4; the Banks' appeal on Ground 5 would have been allowed; and Venice's appeal would have been dismissed. Understandably, the Court of Appeal's judgment is much lighter on the parties' submissions on, and the Court's rationale for deciding, these Grounds. We only go into grounds 1, 2 and 5 below.

    Grounds 1 and 2 of the Banks' appeal:

    In reaching his conclusion that the swaps were speculative, the Court of Appeal suggested that the first instance judge made a number of errors of principle, with the "root error" being his failure to factor into his analysis that it was uncontested that the original Bear Stearns Swap (from which the swaps derived) was a valid contract which amounted to hedging. 

    The Court specifically criticised the fact that the first instance judge, in concluding that the swaps were speculative, did not rely on expert evidence of Italian law in his analysis of a whole series of Italian first instance and regional court of appeal judgments. Even if the first instance judge had been relying on expert evidence, the Court of Appeal considered that the first instance judge was asking the wrong question. Quoting Dexia Crediop SpA v Comune di Prato, the Court noted that "[i]n the case of disputed questions of foreign law, the task for the trial judge is to determine what the highest relevant court in the foreign legal system would decide if the point had come before it”. 

    The Court considered that if the first instance judge had focused on the right question and taken account of the fact that the Bear Stearns Swap was a valid hedge, he would have concluded that the Italian Supreme Court would have concluded that the swaps were also hedging and not speculative.

    It was further found that the first instance judge's reasoning in relation to Article 119(6) of the Italian Constitution was "infected by the same errors as he made in relation to Ground 1". The judge overlooked the fact that the Bear Stearns swap was valid hedging, under which the negative MTM was an existing exposure which Venice faced. As such, the Court of Appeal held that in circumstances where the Banks took over the Bear Stearns swap and paid the novation fees effectively to stand in the shoes of Bear Stearns, it could not be said that the novation fees somehow became an upfront payment.

    Ground 5 of the Banks' appeal and Venice's appeal: the restitution counterclaim

    The Court held that the first instance judge was correct in deciding that the applicable law for the restitution claim was English law (rather than Italian law), since that was the law of the jurisdiction with which the unjust enrichment claim had its closest and most real connection (on the basis that it was English law that governed the swaps).  

    On time bar, the Court of Appeal reversed the first instance decision and found that a local authority in the position of Venice, exercising reasonable diligence, would have recognised that it had a worthwhile claim justifying preliminary steps towards issuing proceedings in the English High Court from around the time when the Prato claim was issued in 2010.  Consequently, under section 32(1)(c) of the Limitation Act 1980, in so far as Venice’s restitution claim related to payments made before August 2013 (i.e. six years prior to the issuance of the High Court claim), it was time barred.

    On a change of position defence, the Court of Appeal rejected the argument that to allow the defence would stultify the policy that contracts which are ultra vires should not be enforceable.  Likewise the Court rejected the notion that the change of position defence was not available to the Banks because the taking out of the hedges was an independent choice by the Banks, which took the risk of non-payment by Venice under the swaps, finding that the Banks received payments under the swaps believing the swaps to be valid, such that the money was "theirs to keep".


    The Court of Appeal has clarified the position under Italian law in relation to the definition of what "speculation" is as a matter of Italian law. As such, this judgment is likely to have an impact on Italian swap cases before the English Courts.

    Grounds 1 and 2 are somewhat decided on the facts.  At a macro level, it is helpful that another swap has been found to be the right side of Cattolica, and that the English Court continues to resist a broad application of the decision, but a different fact pattern could still go the other way.  Each transaction structure and fact pattern needs to be looked at on its own merits and with tailored capacity opinions.

    Understandably, once the Court made its findings on Grounds 1 and 2, it deals very lightly (and on an obiter basis) with the remaining Grounds, but those are likely the points of greater general application. That said, the (obiter) findings on the other Grounds, are helpful for banks, in particular:

    1. On limitation, that a local authority in the position of Venice, exercising reasonable diligence, would have recognised that it had a worthwhile claim justifying preliminary steps towards issuing proceedings in the English High Court from around the time when the Prato claim was issued in 2010;
    2. On governing law for the restitution claim, that it should follow the law of the contract (usually); and
    3. On change of position, that it should be available even where payment on the hedges precedes the receipt of monies on the swap.
     1 Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890; South Tyneside MBC v Svenska International plc [1995] 1 All ER 545



    Stay ahead with our business insights, updates and podcasts

    Sign-up to select your areas of interest