“The task for the Court is to evaluate the expert evidence of Italian law and to predict the likely decision of the highest court in the relevant Italian system of law if this case had been litigated there on each of the points in dispute. As explained below, these courts are the Council of State for administrative law matters and the Court of Cassation for civil law matters.”
“Municipalities, Provinces, Metropolitan Cities and Regions have their own assets, allocated to them pursuant to general principles laid down in the State law. They may have recourse to indebtedness only for the purpose of financing investment expenditures [with the simultaneous definition of amortization plans and provided that the budget balance is complied with reference to all entities of each region]. Any State guarantee on loans taken out by them is excluded.”
“i) The transaction is explicitly carried out to reduce the risks connected with an underlying debt instrument. [“limb (a)”] ii) There is a ‘high correlation’ between the characteristics of the underlying debt and those of the derivative transaction.
“i) Does Section 8 of Cattolica hold that Italian local authorities lack capacity to enter into speculative derivative transactions, and, if so, was that decision correct as a matter of Italian law? ii) Did Sections 8 and/or 10 of Cattolica hold that swaps were a form of indebtedness (whether for the purposes of Article 119 of the Italian Constitution or otherwise) and that local authorities did not have capacity to enter into them other than for the purpose of financing expenditure? …”
“i) A public authority had contractual capacity to conclude derivative contracts until the 2013 Finance Law came into effect. ii) However, only in the case of a hedging (and not a speculative) derivative “could ... a local authority be said to have capacity to enter into them”.”
“I will not attempt to formulate a definitive test of what makes a derivative speculative as a matter of Italian law, when the Supreme Court in Cattolica did not itself do so, and when it remains possible to apply a restriction by reference to that criterion without doing so ([215]). The Italian case law identifies a number of indicia or features which, either individually or in combination, may have the effect that a derivative is a hedging transaction, or a speculative transaction (many of which, as Mr Cox KC submitted, are reflected in English case law on the same topic).”
“226. The impact on the terms of the Transactions of structuring the collar to cover the costs of winding up the Bear Stearns IRS was considerable: i) This was the principal reason why the Transactions had a very significant MTM in the Banks’ favour from the outset (a combined positive Day 1 MTM of c€10.5m in the Banks’ favour). ii) This was the principal reason why the value to the Banks of the interest rate floor (estimated by the experts at between€12.4m and€12.974m ) was more than five times the value to Venice of the cap (estimated by the experts at between€1.7m and€2.4m ). iii) This was the principal reason why, on the basis of a Day 1 statistical probabilistic calculation, the probability of Venice losing money on the Transactions was high: a) On Ms Bowie’s calculations, the probability of a negative pay-off for Venice under the Transactions was between 77.1 and 78.7% (depending on whether or not the calculation is performed on an “absolute” basis or on a basis which discounts future cashflows to present value), whereas if the amount paid to wind up the Bear Stearns IRS is removed from the calculation, the figure is 59.3%. b) Mr Malik did not put forward his own calculation of the probability of a negative pay-off for Venice under the Transactions or challenge Ms Bowie’s calculation of 78.7%, saying that in his experience banks did not produce such calculations and he did not consider that they had utility for customers. He did perform a calculation removing the amount paid to wind down the Bear Stearns IRS from Ms Bowie’s calculation and arrived at a figure of 57.3%. The Banks’ closing submissions did not challenge Ms Bowie’s figure, but noted that “stripping out” the Bear Stearns IRS wind up cost reduced that figure to 57.3% on Mr Malik’s figures. iv) On Mr Malik’s evidence, it led to the floor being between 80 and 100 basis points higher than it would otherwise have been. v) On Ms Bowie’s calculations, it meant that the Transactions involved a modelled “realistic worse case” outcome for Venice of the order of€70.6m (modelling to a 95% confidence level). Mr Malik gave evidence that the MTM distribution analysis which Ms Bowie had performed would be of limited use to customers, and that banks did not provide MTM distribution analyses to customers. He did accept, however, that the effect of including the large negative MTM from the Bear Stearns IRS was to lower the probability of the Transactions being positive in the future. 227. In my view, Mr Cox KC was right to submit that, in addressing the cost of winding up the Bear Stearns IRS through the terms of the Transactions, Venice was obtaining the possibility that interest rate movements during the life of the Transactions would be such that Venice would not have to pay a sum equivalent to the wind-up cost, but in return, was running the risk that interest rate movements during the life of the Transactions would be such as to lead to it paying a great deal more. 228. The decision to address the cost of winding-up the Bear Stearns IRS within the terms of the Transactions had other consequences: i) It meant that the terms of the Transactions were in material and financially significant respects (the level of floor and cap) not determined by the terms of the Rialto Bond (although I accept that important terms were so determined – the Notional Amounts, the amortisation rate, the maturity date and the interest rate received by Venice from the Banks). ii) It meant that the minimum interest rate which Venice was committing to pay was not aligned with the forward rate curve at the time of contracting. iii) It involved the assumption by Venice of a new and significant risk (viz of having to pay interest to the Banks at the floor level while receiving interest payments at a much lower rate) which did not arise under the Rialto Bond. While the character of the Transactions must be determined ex ante, some indication of the degree of risk run can be seen in the fact that by the end of the most recent payment period (24 June 2022 ), Venice had made total payments to the Banks of€70,995,695.95 (in part because EURIBOR 6m became negative in November 2015). 229. Standing back, therefore, and considering the matters discussed in [226] to [228] above: i) The Transactions were explicitly carried out in the terms adopted both to reduce the risks connected with the Rialto Bond and to cover the winding-up costs of the Bear Stearns IRS (CONSOB Determination (a)). ii) While many of the terms of the Transactions matched the financial characteristics of the Rialto Bond, important and financially highly significant terms were arrived at for other reasons (CONSOB Determination (b); the Court of Cassation Decision No 19013/2017, the Court of Rome8 January 2016 , Decision No. 212, the Court of Novara,24 July 2012 , Decision No. 569, and, the Court of Turin,21 October 2021 , Decision No. 4685). iii) There was a very significant difference between the MTM of the cap and the floor, such that Venice was providing the Banks with a protection of a significantly greater value than the protection it was obtaining from the Banks (the Court of Appeal of Milan in Decision No 2393/2020 and cf Standard Chartered Bank v Ceylon Petroleum Corp[2012] EWCA Civ 1049 , [9]-[12]). iv) The fact that the desire to cover the winding-up costs of the Bear Stearns IRS was a highly significant factor in setting the terms of the Transactions itself pointed to the speculative character of the Transactions (Decision of the Court of Orvieto of12 April 2012 and of the Court of Turin of21 October 2021 in Decision No 4685/2021). It meant that the Transactions were, to a significant extent, serving the purpose of seeking to address a past adverse event (cf Standard Chartered Bank v Ceylon Petroleum Corp, [9]-[12]). v) The significant non-alignment between the terms of the Transactions and the prevailing forward rate curve was also suggestive of speculation (Supreme Court Decision No 21830/2021). vi) The fact that Venice took on a significant new risk to which it was not exposed under the Rialto Bond was also suggestive of speculation (Professor Alibrandi’s evidence and cf. Credit Suisse International v Stichting Vestia Groep[2014] EWHC 3103 (Comm) , [217], UBS AG v Kommunale Wasserwerke Leipzig GmbH[2014] EWHC 3615 (Comm) , [159] and Standard Chartered Bank v Ceylon Petroleum Corp[2012] EWCA Civ 10494 , [9]-[12])). 230. As Venice submitted in its closing, the structuring of the Transactions to cover the costs of winding-up the Bear Stearns IRS with its substantial negative MTM was: “akin to borrowing money but instead of repaying it on predictable terms, entering into a bet with a range of possible outcomes. Venice might never have had to repay the Bear Stearns money at all, if rates had suddenly risen to well above the cap and stayed there such that it was in the money throughout the life of the swap. Conversely, Venice might – as has in the event occurred – have had to pay it back many times over, because its impact on the floor level [has] resulted in Venice paying much more than would otherwise be the case. The only rational basis for proceeding in such a way is the possibility that the bet could have worked out better for Venice than if it had simply paid the Bear Stearns break cost itself … Borrowing money on terms that one might never have to repay it, might have to repay a much greater sum, or might have to pay anything in between for it depending on where interest rates sit, is speculation.” 231. Having regard to the cumulative effect of these factors, and regardless of whatever uncertainties might arise at the fringes of this debate, I am satisfied that an Italian court would clearly find that the Transactions were speculative for the purpose of the legal restriction under Italian law formulated in Cattolica. The most that can be said is that the Transactions served mixed motives (as I accept). However, the Court of Appeal of Milan in Decision No 2393/2020 noted that: “An invalidity that - due to its speculative characteristics - must therefore affect the entire contract, and not only the part that concerned the imbalance between the MTM of the cap option and the MTM of the floor option, as also argued in the alternative by the appellant and, in the opinion of this Court, without foundation.” 232. In any event the significance of the speculative elements of the Transactions (as outlined at [226]-[228] above) were such that the Transactions can fairly be characterised as predominantly speculative.” a) On Ms Bowie’s calculations, the probability of a negative pay-off for Venice under the Transactions was between 77.1 and 78.7% (depending on whether or not the calculation is performed on an “absolute” basis or on a basis which discounts future cashflows to present value), whereas if the amount paid to wind up the Bear Stearns IRS is removed from the calculation, the figure is 59.3%. b) Mr Malik did not put forward his own calculation of the probability of a negative pay-off for Venice under the Transactions or challenge Ms Bowie’s calculation of 78.7%, saying that in his experience banks did not produce such calculations and he did not consider that they had utility for customers. He did perform a calculation removing the amount paid to wind down the Bear Stearns IRS from Ms Bowie’s calculation and arrived at a figure of 57.3%. The Banks’ closing submissions did not challenge Ms Bowie’s figure, but noted that “stripping out” the Bear Stearns IRS wind up cost reduced that figure to 57.3% on Mr Malik’s figures. “akin to borrowing money but instead of repaying it on predictable terms, entering into a bet with a range of possible outcomes. Venice might never have had to repay the Bear Stearns money at all, if rates had suddenly risen to well above the cap and stayed there such that it was in the money throughout the life of the swap. Conversely, Venice might – as has in the event occurred – have had to pay it back many times over, because its impact on the floor level [has] resulted in Venice paying much more than would otherwise be the case. The only rational basis for proceeding in such a way is the possibility that the bet could have worked out better for Venice than if it had simply paid the Bear Stearns break cost itself … Borrowing money on terms that one might never have to repay it, might have to repay a much greater sum, or might have to pay anything in between for it depending on where interest rates sit, is speculation.” “An invalidity that - due to its speculative characteristics - must therefore affect the entire contract, and not only the part that concerned the imbalance between the MTM of the cap option and the MTM of the floor option, as also argued in the alternative by the appellant and, in the opinion of this Court, without foundation.”
“In short, Cattolica holds that Article 42(2)(i) (and by implication Article 119(6)) applies to the following swaps: i) Swaps “if they are of the type with an upfront loan”
“I am satisfied that the amount paid by the Banks to Bear Stearns and then “embedded” into the terms of the Transactions constituted an “upfront” for the purposes of the Cattolica principles: i) The rationale for treating a swap with an upfront payment by the bank to the local authority as expenditure or indebtedness is because it involves taking a benefit at one point in time (and in one financial year) in return for structuring the transaction in a manner which, in Day 1 PV terms at the date of transacting, is adverse to the local authority, with the attendant enhanced risk of payments by the local authority in subsequent financial years. It may be that there will never in fact be a negative cash outflow by the local authority (because the market moves in a manner which ultimately reverses that adverse Day 1 PV from the local authority’s perspective). However, Cattolica decides that, as a matter of Italian law, that risk is sufficient to engage Articles 119(6) and 42(2)(ii). ii) That rationale is equally applicable in the present scenario. There was “jam today” (in that the funds were made available to meet the price of exiting a transaction which Venice wished to exit) in return for accepting a greater risk of bare bread tomorrow. The fact that the “upfront” here was not paid to neutralise an imbalance in the MTM of the respective obligations, but the respective obligations are structured in an unbalanced way to cover the cost of the “upfront” does not negate the issues of inter-budgetary equity which Article 42(2)(i) recognises nor the limits of Article 119(6) as established in Cattolica. iii) I accept Mr Cox KC’s argument that the fact that the payment in question moves from the Banks to Bear Stearns rather than through Venice does not change the analysis. Professor Gentili accepted in cross-examination that if A (sc Venice) had asked C (sc the Banks) to make the payment to B (sc Bear Stearns), it would still be treated as an upfront payment by C to A (Day 6/107). That is essentially what happened. iv) While in no way determinative, it is noteworthy that the Banks referred to the payment being made to Bear Stearns to unwind the Bear Stearns IRS as an upfront. A particularly telling internal communication, in the context of the case as a whole, was a note prepared by Intesa in 2009 when explaining the high negative MTM of the Transactions from Venice’s perspective by “the need to absorb the Upfront paid to the municipality for the early termination of the derivative with Bear Stearns”.”
“i) Article 8(1) of the Rome Convention recognises that where the issue arises as to the existence of an agreement which, if concluded, would be subject to English law by virtue of a choice of law, English law will be applied in determining whether or not a contract has been concluded. That reflects the importance attached to a putative applicable law, even when there is a dispute as to whether or not a contract was concluded. ii) On that basis, English law has been applied in this case to issues relating to the Transactions such as the consequences of Venice’s lack of capacity and whether the lack of actual authority on Mr Dei Rossi’s part is sufficient to render the Transactions void. iii) Those matters are sufficient to show that, even when the validity of the contract is in dispute, or it has been determined that the contract is void, the parties’ putative choice of English law is still legally significant. iv) Further, there is, at least, a logical connection between the system of law which decides that a contract is void (English law in this case), and the law to be applied in determining what the consequences of it being void are on the parties to the extent they had purported to perform it. [The judge then cited an observation by Jenkins LJ] in Arab Bank Ltd v Barclays Bank (Dominions, Colonial and Overseas)[1953] 2 QB 527 , 572] v) While the issue does not appear to have been raised directly in Haugesund, Aikens LJ appears to have assumed that English law governed the restitutionary claim in respect of a void contract which would have been governed by English law, and addressed the significance of the foreign statute to such a claim not on the basis that the case was being argued by reference to English law only as a matter of convenience but on the basis that English law was indeed applicable (see [97]- [100]). vi) Finally, the payments in question were made by Venice on the understanding that they were required by English law obligations, in discharge of English law debts, with the Banks having the same understanding in receiving them. The fact that the payments were made and received on the basis of assumed English law obligations is, to my mind, highly significant, it being the natural expectation in those circumstances that English law would apply to issues relating to security of receipt and rights of recovery.”
“the parties shared a common understanding that they owed each other binding obligations, on the faith of which one of them changed his position, and then faced an unjust enrichment claim from the other when the true position became apparent”
“…the decision to incur the obligation (in certain market conditions) to make payments under the hedge was undoubtedly taken in anticipation of the fact that, in those same market conditions, the bank would receive a largely equivalent payment from its counterparty under the impugned swap.”
“I can find nothing in that summary which would deny the Banks a change of position case where they had entered into back-to-back transactions by which they assumed (conditional) payment obligations in anticipatory reliance of receiving essentially the same payments from Venice.”
“i) England and Wales is the contractual forum in which Venice’s claims had to be brought. ii) A noticeable feature of this case, therefore, is that the commencement of proceedings in the contractual forum could only challenge the position under Italian law as a matter of fact, rather than by (for example) seeking to take the point to the Supreme Court to determine the position under English law. iii) So far as the likely position in English proceedings is concerned as noted at [381] above, as late as 2015, Walker J rejected very similar arguments in the Prato case, and an appeal against the Article 119 aspects of that decision failed in 2017, both decisions not treating the Bologna Court of Appeal decision in Cattolica as sufficient. Those findings could have been given the status of prima facie evidence in any English proceedings (see [165(ii)), and in any event are likely to have strongly influenced any English judge. Indeed, given the terms of the Court of Appeal judgment quoted at [162], it is difficult to see how the claims would have been viable in the absence of a decision at a higher level. iv) I have already explained at [276] my reasons for concluding that the decision of the Supreme Court in Cattolica represented a fundamental change in the interpretation of the relevant legislative and regulatory provisions. v) For those reasons I am satisfied that, exercising reasonable diligence, Venice could not have discovered that it had a “worthwhile claim” prior to the Cattolica decision in the Supreme Court. vi) It follows that none of Venice’s claims for restitution are time-barred.”
“…Findings of fact as to foreign law are in a special category in part because, in certain circumstances, in particular when the foreign law is a common law system analogous to the judges’ domestic law, the judge at first instance and the judges in the appellate courts can use their legal skills and experience in the analysis of domestic law to analyse the foreign law. In such circumstances the appellate judges are not at any significant disadvantage in carrying out that analysis compared with the trial judge. While the circumstances of cases may vary widely, the Board derives some propositions from the case law. 11. First, the task of the trial judge when there are disputed questions of foreign law is to determine what the highest relevant court in the foreign legal system would decide if the point were to come to it: Dexia Crediop SpA v Comune di Prato[2017] EWCA Civ 428 ; [2017] 1 CLC 969 (“Dexia”), para 34; Morgan Grenfell & Co Ltd v SACE Istituto per I Servizi Assicurativi del Commercio[2001] EWCA Civ 1932 (“Morgan Grenfell”), para 50. It is not sufficient for a party to identify a judgment of a foreign court of first instance which may be on point and assert that the task of the appellate court is simply to analyse that judgment. 12. Secondly, if the foreign legal system is a common law system which adopts a similar approach to legal reasoning and statutory interpretation to that of English law, the English judge at first instance is entitled and required to bring to bear his or her knowledge of the common law and the rules of statutory construction in analysing the foreign law. So too is the appellate court. In MCC Proceeds Inc v Bishopsgate Investment Trust plc [1999] CLC 417 (“MCC Proceeds Inc”), a case concerned with the construction of the Uniform Commercial Code which was part of the law of New York, a common law system, Evans LJ giving the judgment of the Court of Appeal stated (para 13): “When and to the extent that the issue calls for the exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the [appellate] court is as well placed as the trial judge to form its own independent view.”
“51…However, in approaching the expert evidence of Italian law, it was in our view appropriate for the judge to have at least some regard to his own experience and training in so far as it was relevant to the particular issues which he was considering. 52…the judge would have to decide, in the light of the principles of Italian law which he found to exist, what conclusions the Corte di Cassazione [the Supreme Court] would have reached on the key questions in the case. In carrying out that exercise the judge would apply the principles of Italian law to the facts as he found them, which would involve essentially the same exercise as is performed by the judge in every case. To that extent at least he would have to apply his own legal training and experience.”
“The Municipality of Venice and [Banca Intesa/Dexia] mutually acknowledge that this Interest Rate Swap transaction, executed under the abovementioned financial conditions, takes into account the Mark to Market of the Interest Rate Swap agreement originally entered into the Municipality and Bear Stearns on19/12/2005 and transferred on this day to [the Bank] for a quota equal to [68%/32%] (the Old Confirmation is attached to the Novation Agreement entered into on this date). This Mark to Market, equal to [€ 5,484,200 /€2,580,800 ] at the moment of the transaction, will be reflected in this swap entered into in respect of the restructured bond.”
“the distinction between hedging and speculative derivatives, based on the criterion of the different degree of risk of each of them, meant that only in the first case could a local entity be said to have capacity to enter into them.”
“The prevailing practice of the English courts thus seems to be to apply the lex causae as it exists from time to time and to give effect if need be to retrospective changes therein.”
“(2) The proper law of the obligation is (semble) determined as follows: a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract. b) If it arises in connection with a transaction concerning an immovable (land), its proper law is the law of the country where the immovable is situated (lex situs); c) If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs.”
“so far as concerns the authorities referred to, the sub-rule [a)] is wholly without judicial support”
“the existence of the contract or the attempt by parties to enter into a contract, will be relevant and material factors in resolving any issue which arises, but will not per se be determinative of that connection.”
“My conclusion is thus that I should have no regard to provisions in the master agreement and schedule identifying English law as the governing law and recording an irrevocable submission to the jurisdiction of the English courts. In these circumstances, subject to a proviso advanced by Dexia, there can be no contest that the obligation to give restitution to Prato has its closest and most real connection to Italy.”
“clause (2)(a) seeks only to assist in the identification of the proper law of the restitutionary obligation in circumstances of contractual failure; it does not state an inflexible rule which must be applied without exception to every case connected to a contract…”
“An obvious case where sub-Rule (2)(a) may apply is where the contract proves ineffective and claims are made for recovery of sums paid under it”
“…the existing authorities of Kleinwort Benson Ltd. v. South Tyneside Metropolitan Borough Council [1994] 4 All E.R. 972 and South Tyneside Metropolitan Borough Council v. Svenska International Plc. [1995] 1 All E.R. 545 do not establish a clear rule that no such defence can be raised. The Svenska case in particular turned on special facts, and I prefer to express no view as to whether that defence, which was recognised in Lipkin Gorman v. Karpnale Ltd. [1991] 2 A.C. 548, could ever be established by reference to market transactions.”
“When and to the extent that the issue calls for the exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the court is as well placed as the trial judge to form its independent view.”
“Finally, there are many Italian court decisions which have addressed the issue of whether a derivative was hedging or speculative in nature without referring to the CONSOB Determination or applying the three-stage test…”
“In 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 conclusion cannot I think be escaped that a lack of substantive power to enter into an agreement can only properly be characterised as going to capacity.”
“It is unnecessary to decide the issue for the purpose of disposing of the appeal. In general, it is unwise to deliver judgments on points that do not have to be decided. There is no point in cluttering up the law reports with obiter dicta, which could, in some cases, embarrass a court having to decide the issue later on.”
“Legal systems may have an internal balance which is destroyed if one part of what is essentially a single problem is dealt with by one legal system and another by a different legal system…where the parties have chosen the law to govern their contract…it is almost inconceivable that the parties expected another law to apply to unjust enrichment actions which flow from the contract.”
“My conclusion is that the majority of the House of Lords in the Westdeutsche Landesbank case did depart from the decision in Sinclair v Brougham that a lender under a borrowing contact that is void because ultra vires the borrower, cannot recover the sum lent in a restitutionary claim at law. As a result of the decision of the majority of the House of Lords in the Westdeutsche Landesbank case such a claim can be advanced. It is, of course, not a claim based on any implied contract or promise and it does not indirectly enforce an ultra vires contract, for the reasons given by Lord Goff in Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996] AC 669 , 688G-H. Moreover, I respectfully agree with him that any such restitutionary claim must be subject, where appropriate, to any available restitutionary defences, including any that can legitimately be based on public policy. If I am correct then Sinclair v Brougham can “fade into history” as Lord Goff hoped it would.”
“…it is the private interests of the two parties which are mainly in issue, and the equitable considerations requiring the benefit to be returned to the plaintiff can be cancelled out by equitable considerations arising from a change of position on the part of the defendant.”