Venetian bind
21 October 2022
In proceedings brought by two Italian banks, Banca Intesa Sanpaolo and Dexia Crediop (together "the Banks") against the Comune Di Venezia ("Venice") [2022] EWHC 2586 (Comm)(14 October 2022), the Banks sought declarations that certain interest rate swap transactions ("the swaps") entered into with Venice under a 1992 ISDA Master Agreement governed by English law and electing for English jurisdiction were valid and binding. In the alternative, if the swaps were not valid and binding, the Banks alleged that Venice was in breach of various contractual duties or liable to it in respect of various misrepresentations and/or misstatements, for which they claimed damages.
Having considered expert evidence on Italian law, the Judge found that Venice lacked capacity to enter into the swaps on the basis that they involved impermissible elements of speculation and indebtedness, meaning that they were void and unenforceable as a matter of English law.
The Banks also failed in their arguments based on contractual estoppel and breach of contract, which relied on representations by Venice that it had the power to execute the swaps documentation and perform its obligations under the swaps, and that they did not violate or conflict with any law applicable to Venice.
The Judge gave various reasons for rejecting those arguments, including that institutions with constrained powers should not by their own acts be able effectively to enlarge their powers, and that 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.
However, it was held that although Venice was entitled to restitution of the amounts paid to the Banks under the swaps, the Banks were in principle entitled to rely on a defence of change of position in respect of payments made under "back-to-back" market-facing swaps ("the Hedges") entered into by the Banks to hedge their exposure to Venice. As at the date restitution was sought and/or ordered, the Banks would have made net payments under the Hedges which could be quantified, and the current MTM cost of winding-up the Hedges would be known.
The Judge acknowledged his conclusions were inconsistent with two mid-1990s first instance decisions and would be subject to the "inevitable appeal".
We shall watch this space for any appeal…
Authors: James Levy, Partner, and David Capps, Senior Consultant
