Italian Supreme Court rules in favour of banks in municipality swap dispute
Dexia-Depfa vs Province of Pisa: Italian Supreme Court decision No 773 of 20 January 2014
The Italian Supreme Court has put an end to the long standing litigation in Italy between Dexia Crediop SpA (Dexia)/DEPFA Bank plc (Depfa) and the Province of Pisa, an Italian local public body (Pisa), concerning interest rate swap contracts (the Swaps) executed by the parties in 2007. The ruling confirms that, as a matter of Italian law, the Swaps entered into by the Banks were valid and that there was no obligation on the Banks to disclose the financial components of the price of the derivative transactions. Related proceedings in England had been stayed pending the Italian Supreme Court’s decision.
In July 2007, Dexia and Depfa (collectively the Banks) entered into Swaps with Pisa.The Swaps were documented under 1992 International Swaps and Derivatives Association (ISDA) Master Agreements, and Schedules and Confirmations under those ISDA Master Agreements. The contracts also contained English governing law and jurisdiction clauses.
On 5 June 2009, Pisa wrote to Depfa and Dexia challenging the enforceability of the Swaps and requesting an immediate write-off of amounts owed by Pisa to the Banks under the Swaps.
The Banks each commenced proceedings against Pisa on 26 June 2009 in the English Courts seeking declaratory relief, including in particular a declaration that the Swaps were valid and binding. Pisa subsequently issued "executive decisions" in which it purported to revoke a number of decisions taken by it in 2007 to enter into the Swaps (the Executive Decisions). Pisa purported to exercise this right of "self-redress" under public law powers available to it under Italian law.
Pisa failed to pay amounts due under the Swaps on the payment date of 28 June 2009, and on 30 June and 2 July, respectively, the Banks served notices on Pisa in respect of its failures to pay. The Banks subsequently amended the English claim forms to include money claims for these amounts and served them on Pisa on 30 October 2009.
Separate proceedings were commenced by the Banks in the Italian Regional Administrative Court on 19 October 2009 challenging the validity of the Executive Decisions, with further claims subsequently added on 13 November 2009 and on 3 May, 2010.
Pisa subsequently challenged the jurisdiction of the English Courts on the basis that any proceedings in England would be "principally concerned" with issues within Article 22(2) of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and as such should be heard in Italy. On 25 May 2010, the English Court dismissed Pisa's application and ordered Pisa to make a payment of GBP 100,000 (GBP 50,000 to each of Dexia and Depfa) on account of the Banks' costs relating to the jurisdiction challenge and refused Pisa permission to appeal.
In 2010 the Consiglio di Stato issued the preliminary decision (the Preliminary Decision) appointing a technical expert from the Bank of Italy and stating its own jurisdiction over the dispute concerning the validity of the self-redress decision by which Pisa purported to cancel the Swaps on the ground of the alleged violation of Article 41 of Law Decree 448 of 28/12/2001 (Article 41).
On 27 November 2012, the Consiglio di Stato issued its final (and now landmark) decision No 5962 (the Final Decision) in which it held, contrary to the self-redress decision of Pisa, that the Swaps were not in violation of Article 41 and that there was no obligation on the Banks to disclose the financial components of the price of the derivative transactions.
Pisa appealed the Final Decision before the Italian Supreme Court alleging that the Consiglio di Stato lacked jurisdiction.
With decision No 773/2014, the Italian Supreme Court rejected Pisa’s challenge which it held could not concern the Final Decision, which had decided the dispute, but should rather have been directed at the Preliminary Decision.
As mentioned, following the decision of the Italian Supreme Court, the Final Decision of the Consiglio di Stato has become final and no longer subject to any further appeal (res judicata). The English proceedings have been stayed pending the decision of the Supreme Court.
The Supreme Court’s decision represents a resounding success for the Banks.
Allen & Overy LLP acted for the Banks.
