“For many years the Municipality of Busto Arsizio was able to substantially maintain fiscal pressure unchanged, but in the meantime, the gap between income and expenses has widened considerably, also because of lower transfers from the State. Therefore, on the one hand, income continued to increase at an ‘unchanged’ rate, while on the other, the cost of staff and utilities, in addition to the increase given by the rate of inflation, resulted in a significant increasein current expenses of more than EUR 4,000,000.00”
“the application of the derivative instruments (swaps) covered by the Decree of the Minister of Economy and Finance No. 389/03, under which debt may be managed through the application of derivative instruments to change the structure of interest rates.”
“It is considered appropriate to use the above strategies to achieve the maximum economic and financial benefits, but especially with regard to renegotiation and derivative transactions, one should seek the support of a financial advisor who, free of charge, will assist the Administration in the implementation of these strategies.”
“in implementation of the directions contained in the General Development Plan for 2007 intends to acquire, without any charge or commitment whatsoever, a proposal for restructuring its indebtedness situation, in order to reduce budget charges for servicing the debt, maintaining a low risk profile.”
“For all the transactions described up to this point and for all issues of a purely legal nature connected to the performance of the role of adviser, Deutsche Bank shall make fully available to the Municipality of Busto Arsizio the services of Allen & Overy, a leading international law firm with offices in Rome and Milan, the undisputed market leaders in transactions involving Italian local authorities. Attorneys from Allen & Overy law firm shall participate, as required, in meetings between the Municipality and Deutsche Bank, to ensure full legal support for all the individual transactions considered by the local authority. We attach to this proposal, the introduction letter from Allen & Overy law firm, in which it demonstrates its willingness to assist Deutsche Bank in relation to possible capital market transactions for the Municipality of Busto Arsizio. Deutsche Bank shall bear all related costs.”
“Please accept this letter as confirmation that Massimo Fogliani has authority to enter into a relationship and open accounts with Deutsche Bank AG, London on behalf of the Comune di Busto Arsizio.”
“[T]he proposal which involves a higher capital and has a greater financial benefit over the next three years is undoubtedly the Deutsche Bank proposal. This proposal allows an overall financial benefit over the next 7 years (2007-2013) amounting to EUR 13,100,000.00 on the capital. From 2014 through 2031, the Municipality must provide for increased capital allowances of the same total amount. The effects of this transaction must be underlined. In the first few years and in particular up to 2013, the municipality will be able to book as part of its capital revenues the positive value amounts described in Annex A to these minutes (under the item expected differentials). The municipality will therefore be able to use this revenue to finance works on capital account without having to take out new loans. On the other hand, from 2014 to 2031, it will have to finance with current revenues higher charges (for the repayment of capital) equal to the values shown in Annex A with a negative value. The more the Municipality will be able to effectively use the resources that will become available, the more it will benefit from the transaction. As regards interest rates, the new structure provides for a fixed rate of 4.45% in 2007 and a variable rate of 6-month Euribor plus a spread of 0.10% from 2008 to 2031, with a maximum limit of 5.75% and a minimum limit of 5.15%. From an interest structure standpoint, the proposal therefore provides for a limit of 5.75% which will ensure that the municipality improves its current risk position. It should be noted, however, that the floor (i.e. the minimum ceiling that the municipality will have to pay) appears rather high in relation to the forward curve […]. Based on this curve, this value will never be reached and therefore the possibility of modifying the parameter (floor) should be checked with the institute.”
“For the purposes of such legal opinion, we would firstly need to receive the term sheet relating to the transaction and, as soon as available, the resolutions and decisions authorising the transaction (including extracts from the RPP or the PEG to verify the general guideline of the local authority) and the relevant contractual documentation.”
“a) the negotiation and signing of the legal and contractual documentation in English in use in the financial markets and consisting of the ISDA Master Agreement and related schedule, including the related annexes forming an integral part of the above mentioned documentation, as well as the contractual documentation indicating the economic and commercial conditions of the individual swap transaction referred to in the attached proposal (Term Sheet and subsequent Confirmation), with the right to make, where necessary, any changes and additions that may result from changes in the provisions of the law, as well as to agree on any other changes that may be useful and appropriate, in compliance with the conditions set out in this resolution, all on the basis of the attached documentation that is hereby approved; b) the signing and completion of everything else that is necessary or appropriate for the successful execution of the swap transaction described in this resolution and in the attached proposal.”
"This transaction has a positive mark-to-market for Deutsche Bank which, at the time the transaction is entered into, considers the negative mark to market of the "
“Each party represents to the other (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and at all times until termination of such a Transaction) and, for the purposes of Section 3(g), [Busto] represents to [DB] (which representations will be deemed to be repeated by it at all times until the termination of this Agreement) that: - (a) Basic Representations … (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action and made all necessary determinations and findings to authorise such execution, delivery and performance;” (iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;… (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)).… (g) with respect to [Busto] only: (1) Non-Speculation. This Agreement and the Transactions hereunder will be entered into for purposes of managing its borrowings or investments and not for purposes of speculation, pursuant to Article 3, paragraph 3, of Decree no. 389 of1 December 2003 issued by the Treasury Department of the Ministry of Economy and Finance and the Ministry of Interior and published in the Official Gazette no. 28 of4 February 2004 (the “Decree”);… (4) Status. [Busto] has a specific expertise and experience in transactions having as an object financial investments and thereby it is a professional investor pursuant to Article 31 of the Regulation no. 11522 of1 July 1998 , issued by CONSOB (“Regolamento Intermediari”).… (6) Decree. (i) Each Transaction will be entered into in conformity with the Decree and (ii) in compliance with Article 3, paragraph 4, of the Decree, [Busto] shall gradually tend towards ensuring that the overall nominal amount of the transactions entered into between [DB] and [Busto] will not exceed 25% of the totality of the derivative transactions entered into by [Busto]… (h) with respect to each party: (i) Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgement and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered to be investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction. (ii) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts the terms and conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. (iii) Status of Parties. The other party is not acting as a fiduciary for or adviser to it in respect of that Transaction.”
“Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.”
“The purpose was, on the one hand, to change the current concentration of repayment quotas in the short term by redistributing the disbursements over time without naturally extending the final maturity of the debt. In this way it is possible to generate liquidity to be used for the financing of investments by reducing the recourse to new loans. A further purpose was to limit the cost of interest in the event of an increase in interest rates through the presence of a ‘cap’ on the floating rate and a floor rate (collar structure).”
“(1) Without prejudice to any powers exercisable apart from this section but subject to the provisions of this Act … a local authority shall have power to do any thing (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions.”
“If a local authority borrowed£10m . in 1986 for five years at 10 per cent. per annum and LIBOR in 1987 was 12 per cent., the local authority would be unlikely to contemplate a swap. But if in 1987 LIBOR was 10 per cent. and the local authority believed that LIBOR would fall to eight per cent., the local authority might be minded to enter into a swap. In that event the local authority would agree to pay a bank LIBOR every year and the bank would agree to pay interest at 10 per cent. on a notional sum of£10m . until 1991. If in 1988 LIBOR fell to eight per cent., the bank would pay the local authority£200,000 being the difference between the LIBOR of eight per cent. and the fixed rate of 10 per cent. on£10m . The local authority must still pay interest at 10 per cent. on the sum of£10m . actually borrowed in 1986 but the gain of£200,000 from the bank would be available to meet the interest payment. If in 1988 LIBOR instead of falling to eight per cent. rose from 10 per cent. to 12 per cent., the local authority would pay the bank£200,000 and would also be bound to discharge the interest at 10 per cent. due on the sum borrowed in 1986. The success of the swap "replacing" the fixed rate of 10 per cent. by LIBOR would depend on LIBOR falling below 10 per cent. and on average remaining below 10 per cent. until 1991.”
“A swap transaction is successful if a rise or fall in interest rates is correctly forecast; once the forecast has been proved to be accurate the local authority can consolidate the gain thus made by a reverse swap. But if after any swap transaction entered into in anticipation of a fall in interest rates there is a rise in LIBOR or if after any transaction anticipating a rise in interest rates there is a fall in LIBOR the local authority will suffer a loss which will be payable in addition to the net interest payable under the terms of the original borrowing.”
“Firstly, a swap transaction could be agreed which was not linked to any underlying borrowing, for example it could enter into an agreement to pay LIBOR and receive a fixed rate of 10 per cent. If the swap transaction was affected by reference to a notional principal sum of£100m . and LIBOR fell to nine per cent, the local authority would make a profit of£1m . If LIBOR rose to 11 per cent. the local authority would lose£1m . Secondly a local authority that had borrowed£10m . at a fixed rate of 10 per cent. and believed that interest rates were falling, could enter into a swap agreement to pay LIBOR and receive 10 per cent. If LIBOR fell to nine per cent. the local authority would make a profit of£100,000 . If LIBOR rose to 11 per cent. the local authority would lose£100,000 . This was referred to as a “parallel contract” said to “replace” the original interest payment obligation. Thirdly, a local authority might seek to increase the proportion which its variable interest rate obligations bore to its fixed interest obligations. If 90 per cent. of the local authority's borrowings were at fixed rates of interest and 10 per cent. at variable rates, the local authority might by swap contracts agree to pay fixed interest and receive LIBOR and thus increase the proportion of its variable interest obligations. This process was called “re-profiling.””
“But the success of swaps depends on a successful forecast of future interest rates. The power of a local authority to choose between long-term and short-term borrowings and to choose between variable and fixed interest rates, and the power of a local authority to borrow from the P.W.L.B. on favourable terms and to change from variable to fixed rates of interest and the power of the local authority to replace a borrowing with another borrowing, provide opportunity for the local authority to consider whether the overall rate of interest paid by the local authority is reasonable and is protected against volatility of interest rates. The greater the volatility of interest rates, the greater the risk of loss to a local authority as a result of swap transactions. Despite the urgings of counsel for the banks to the contrary, it seems to me there are substantial risks.” 93.Lord Ackner put the position more trenchantly still: “The purpose and function of swap transactions is not to facilitate, to help, or to make more easy the discharge by the local authority of its function of borrowing. The original underlying debt or debts continue in existence and are all unaffected by the swap transactions. In many cases the swap transactions are entered into long after the underlying borrowing and probably were not even in contemplation when such borrowing took place. The function and purpose of the swap transactions is to alleviate the consequences of borrowing by the local authority purchasing what has been conveniently called "a stream of income" or "a cash flow" which will enable it to reduce the nett cost of its borrowing. In the words of Mr. Sumption, appearing for Barclays Bank, interest swap transactions are "a risk mitigating activity." They are designed not to meet any specific loss but to seek to ensure that the local authority pays as little interest on its loans as can be achieved. In this respect they are indistinguishable from any other transaction which involves the hope of gain, which gain is intended to reduce a risk attendant on an underlying transaction. Although the phrase "debt management" may be a convenient one, swap transactions in fact leave the debt wholly unmanaged. Even in the most limited form of "hedging" the swap transaction involves the local authority incurring the following risks. (1) That the movement of interest rates will be contrary to what is anticipated, with the result that the local authority will have wasted the transaction costs, that is the money paid to its brokers for arranging the swap. (2) The credit risk that the opposite party to the transaction may default.”
“If markets in this country [United Kingdom] are to continue to flourish and innovate as successfully as they have in the past, it is essential that participants should be as certain as they can be that what they are doing will be upheld by the law.”
"I wish to record that [the House of Lords decision in Hazell] caused grave concern among financial institutions, and especially foreign banks, which had entered into such transactions with local authorities in good faith, with no idea that a rule as technical as the ultra vires doctrine might undermine what they saw as a perfectly legitimate commercial transaction."
“…I would dismiss this appeal. I do so with little satisfaction. It seems to me unjust that when public bodies misconstrue their own powers to enter into commercial transactions with unsuspecting members of the public, those bodies should be allowed to take advantage of their own errors to escape from the unlawful bargains which they have made. For a local authority to assert the illegality of its own action is an unattractive stance for it to adopt. It is the more striking when, as in this case, the transaction in question is as mundane as a building lease; and the local authority, by taking the point against the member of the public with whom it or its predecessor contracted, thereby robs that member of the public of part of the consideration for entering into the lease.”
“[340] As SCB's derivatives expert, Ms Bossley pointed out in the Joint Expert's Report: ‘. . . at the extreme ends of the spectrum it is clear what is hedging and what is speculating. In the middle of the spectrum there is a grey area where the same action can be hedging or speculation depending on the context, including the party's intention. The existence of a physical position makes it more likely that any particular action involves hedging.’ As further pointed out in a paper of Professor Hieronymous of the University of Illinois in a paper exhibited to the expert report of Mr Begnini, CPC's derivatives expert: ‘This (a suggested definition of hedging) assumes that 'hedging' and 'speculation' are at least different, if not opposite. They are not. All hedges are more or less speculative, and all speculative positions are more or less hedged.’ … Mr Begnini accepted that there is no single definition of hedging. However, he identified various matters which he considered to be indicative of hedging, and various matters which he considered to be indicative of speculation. Such an approach effectively admits that there is no straight-forward dividing line, but that at best a judgmental approach is required where various factors are to be weighed in the balance. The main indicators of hedging which he stressed were: ‘(1) Hedging is concerned with a risk that the hedger actually faces. (2) That risk may have a negative impact on the hedger. (3) A hedge reduces the risk faced. More specifically: 'hedging is an activity undertaken by companies attempting to take control of their own cash flow by ironing out price spikes and troughs in their oil acquisition or sales contracts. Its objective is to reduce future oil price uncertainty and may be seen as having a risk reducing motivation.' All this is achieved by an offsetting transaction. Hedging involves an entity establishing a 'paper' position by purchasing derivative instruments which offset price movements in a market to which it is exposed (the entity's 'physical' position). Thus, for example, an oil importer will hedge the cost of its oil imports (its physical position) by purchasing derivative instruments (its paper position) which offset movements in the price of its oil imports. As the price of its oil import costs increase, the importer will receive payments under the derivative instruments that offset these increases. Mr Begnini stressed that the objective of a hedger is to remove risk and increase certainty, rather than to make profits. Conversely, a speculator will trade with the objective of achieving profits through the successful anticipation of price movements and will take on risk in order to generate profits from anticipating market movements.”
“The court ‘is not entitled to construe a foreign code itself’ (Lazard Bros & Co v Midland Bank Ltd[1933] AC 289 at p 298 (Lord Wright)). (7) Even when there is a proved or agreed translation, “it is still primarily the function of the expert witness to interpret its legal effect, in order to convey to the English court the meaning and effect which a Court of the foreign country would attribute to it, if it applied correctly the law of that country (A/S Tallinna Laevauhisus v Estonian State Steamship Line [1946] 80 Ll L Rep 99 at 108 (Scott LJ)). (8) The “function of the expert witness in relation to the interpretation of foreign statutes must be contrasted with his function in relation to the construction of foreign documents. In the former case, the expert tells the court what the statute means, explaining his opinion, if necessary, by reference to foreign rules of construction. In the latter case, the expert merely proves the foreign rules of construction, and the court itself, in the light of these rules, determines the meaning of the documents” (Alhamrani v Alhamrani[2014] UKPC 37 at [19] (Lord Clarke) approving Dicey, Morris & Collins, ibid, at p 9–019). (9) As to the identification of judgments and other authorities, the court “is not bound to apply a foreign decision if it is satisfied … that the decision does not accurately represent the foreign law” (Dicey, Morris & Collins ibid at p 9–020). In addition, “where foreign decisions conflict, the court may be asked to decide between them, even though in the foreign country the question still remains to be authoritatively settled” (ibid at p 9– 020). (10) It is evident that the quality of expert evidence before the court varies from case to case, and the above principles have to be applied in that light. As has been held in the context of the construction of foreign statutes, the degree of freedom which the English court has in putting its own construction on the translation of foreign statutes, arises out of, and is measured by, its appraisal of the expert evidence. … (13) However, as the claimant submits (correctly in the court’s view) in that case the Court of Appeal was discussing a jurisdiction (the United States) where the doctrine of precedent exists. Where there is a precedent, there may not be much scope in practice for opinion evidence. That is not, however, the position in a civil law jurisdiction like Portugal. As the evidence shows, in Portugal there are conflicting decisions even at the level of the Supreme Court of Justice and decisions where lower courts have rejected an approach previously adopted by a higher court. Thus, even if there is a decision directly on point, the English court may need to consider what a future court would decide.” these rules, determines the meaning of the documents”
“It seems to me that we must consider whether in our opinion this decision was correct, and must consider it as a question of fact upon the evidence. If this were not so, evidence as to foreign law would be useless wherever there was a decision of any foreign judge on the point, and our Courts could only follow that decision as a binding authority. This is not the position of our Courts in such a matter. It may be that we have, strictly speaking, the same power to consider a decision of the ultimate Court of Appeal, but I cannot imagine that an English Court would hold a decision of the final Court of Appeal in the State of New York erroneous according to the law of that State.”
“Provinces and the Municipalities, as well as public bodies recognised as legal persons, enjoy rights according to the laws and uses observed as public law.”
“The public administration, in adopting measures of a nonauthoritative nature, acts according to the rules of private law unless the law provides otherwise.”
“In the application of the law, it shall not be attributed to it any meaning other than the one made obvious by the proper meaning of the words in accordance with the connection between them, and by the intention of the legislator.”
“(1) Municipalities, Provinces, Metropolitan Cities and Regions shall have financial autonomyin terms of revenue and expenditure. (2) Municipalities, Provinces, Metropolitan Cities and Regions shall have independent financial resources. They set and apply taxes and revenues of their own, in compliance with the Constitution and according to the principles of coordination of State finances and of the tax system. They have co-participation in the tax revenues related to their respective territories. … (4) Revenues deriving from the above mentioned sources shall enable Municipalities, Provinces, Metropolitan Cities and Regions to fully finance the public functions assigned to them. (6)…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 resort to indebtedness only for the purpose of financing investment expenditures. Any State guarantee on loans taken out by them is excluded.”
“In order to contain the cost of debt and to monitor public finance developments, the MEF[ Ministry of Economics and Finance ] coordinates access to the capital markets of the provinces, municipalities, unions of municipalities, metropolitan cities, mountain communities and island communities … as well as consortia of local authorities and regions. To this end, these entities regularly send data on their financial situation to the Ministry. The content and data coordination and transmission methods are established by decree of the MEF to be issued jointly with the Ministry of the Interior, after consultation with the Unified Conference referred to in article 8 of Legislative Decree no. 281 of28 August 1997 , within thirty days from the date of entry into force of this law. The same decree approves the rules on debt amortisation and on the use of derivatives by the above entities.”
“In addition to the transactions referred to in paragraph 1 of this article and article 2 of this decree, the following derivative transactions are also allowed: a) interest rate swap between two parties taking the commitment to regularly exchange interest flows connected to major financial market parameters according to the procedures, timing and conditions stated in the contract; b) purchase of a forward rate agreement in which two parties agree on the interest rate that the buyer agrees to pay on a capital at a future date; c) purchase of an interest rate cap in which the buyer is protected from increases in the interest rate payable above the set level; d) purchase of an interest rate collar in which the buyer is guaranteed an interest rate to be paid, fluctuating within a predetermined minimum and maximum; e) other derivative products containing combinations of the above that enable the transition from a fixed rate to floating rate and vice versa when a predefined threshold has been reached or after an established period of time; f) other derivative products aimed at restructuring debt, only if they do not have a maturity subsequent to that of the underlying liabilities. These transactions are allowed when the flows received by the interested bodies are equal to those paid in the underlying liabilities and do not involve, at the time of their conclusion, an increasing profile of the present values of single payment flows, with the exception of a discount or premium to be paid at the conclusion of the transactions, not exceeding 1% of the notional of the underlying liability.”
“that were closely connected and crucial for assessing the validity of swap contracts entered into in general by Municipalities: a) the question of whether the assumption of the obligation by the local entity entering into the contract, involving the named derivative, could be categorised as indebtedness intended to finance non-investment expenditures; and b) the question of determining the body required to authorise such a transaction (which, in this case, was regulated by the city council by means of mere “guidelines”).”
“a) “whether the swap, particularly the swap that included an upfront – and not governed (based on when it became effective) by Italian Law No. 133 of 2008, which converted Italian DecreeLaw No. 112 of 2008 – constitutes, for the local entity, a transaction that results in indebtedness to finance noninvestment expenditures pursuant to Article 30, paragraph 15 of Italian Law No. 289 of 2002”; and b) “whether the execution of the related contract falls within the authority reserved for the City Council, since it entails an expenditure decision that affects budgets for subsequent financial years, pursuant to Article 42, paragraph 2, letter i) of the T.U.E.L.”.”
“After these necessary preliminary clarifications, we can proceed with examining the issue (which is the basis of the questions posed by the division that referred the matter to these Joint Divisions) relating to the execution of derivatives, swaps and IRSs by public entities in general and local entities in particular”
“Above all, to be permissible, the derivative had to be financially cost effective, since entering into speculative derivatives was prohibited”
“Hence, in light of the legal and axiological framework outlined above, we can arrive at a first conclusion, namely: Recognition of the Administration’s capacity to conclude derivative contracts, based on the law in effect until 2013 (when Italian Law No. 147 of 2013 precluded that possibility) and 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 could a local entity be said to have capacity to enter into them.”
“Thus, an analysis conducted on a case-by-case basis, using a practical approach, seems to be appropriate. This approach led the court below to acknowledge the sanctioning consequences with regard to those contracts, since a) in none of the examined contracts was there a determination of the value of the contracts when they were executed (“mark to market”), which careful and meritorious case law of the lower courts has held “an essential element thereof and thus its required typical function/purpose [causa] (rational and thus measurable degree of uncertainty [alea]) which must necessarily be made explicit, regardless of its hedging or speculative function”; and b) the potential liability inherent in every swap contract is tangibly and actually manifested in the upfront clause, which was in fact present in two of the three contracts at issue in the case.”
“Based on that analysis, grounds nos. 3, 4 and 5 are groundless and thus must be dismissed, and we must confirm the rule of law as follows: In regard to derivative contracts entered into by Italian Municipalities based on the laws in effect until 2013 (when Italian Law No. 147 of 2013 precluded any further use of them) and the distinction between hedging and speculative derivatives, based on the criterion of the different degree of risk of each of them, although local entities could enter into the former with qualified financial intermediaries, local entities could usefully and effectively do so only if the contractual object [oggetto] could be precisely measured/determined, including the mark to market criterion, probabilistic scenarios and the ‘hidden costs’. This is to reduce to a minimum and make the entity aware of all of the aleatory aspects of the contract, since they are highly inconsistent with the rules relating to public finance and they introduce variables that are not compatible with the fixed nature of expenditure commitments shown in the financial statements”
“As a result, the appealed judgment cannot be challenged that fully upheld the Municipality’s argument that the swap contract and, particularly (but not only) the contract that included an initial upfront clause constituted, because of its aleatory nature, a form of current or potential indebtedness for the public entity.”
"The question whether an adverse inference may be drawn from the absence of a witness is sometimes treated as a matter governed by legal criteria, for which the decision of the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 is often cited as authority. Without intending to disparage the sensible statements made in that case, I think there is a risk of making overly legal and technical what really is or ought to be just a matter of ordinary rationality. So far as possible, tribunals should be free to draw, or to decline to draw, inferences from the facts of the case before them using their common sense without the need to consult law books when doing so. Whether any positive significance should be attached to the fact that a person has not given evidence depends entirely on the context and particular circumstances. Relevant considerations will naturally include such matters as whether the witness was available to give evidence, what relevant evidence it is reasonable to expect that the witness would have been able to give, what other relevant evidence there was bearing on the point(s) on which the witness could potentially have given relevant evidence, and the significance of those points in the context of the case as a whole. All these matters are inter-related and how these and any other relevant considerations should be assessed cannot be encapsulated in a set of legal rules."
“It is the Defendant’s case that the Transactions violate Article 119 of the Italian Constitution on the basis that they entail anactual or potential resort to indebtedness that is not undertakenas a means of funding investments and/or the Italian rules ofpublic finance that are referred to by the Italian Supreme Courtat paragraph 8.1 of its judgment in the Cattolica case,…”
“the constitutional justification”) for limitations which have been introduced, those limitations are lines drawn as at those points in time. That is entirely consistent with what the court said in Decision no.52/2010 at [15]: “In this respect, it must be noted that the final paragraph of article 119 Constitution places a financial equilibrium restriction consisting in allowing the local authorities to recourse to indebtedness only to finance investment expenditure. This Court has already clarified that the notions of "indebtedness" and "investment" cannot be determined in an absolutely unequivocal way a priori (decision no. 425 of 2004). Therefore, it is up to the State, with a clearly not unreasonable statement, to define, in relation to the various contexts that may arise, the meaning of the expressions in question.”
“a) “whether the swap, particularly the swap that included an upfront …. constitutes, for the local entity, a transaction that results in indebtedness to finance non-investment expenditures pursuant to Article 30, paragraph 15 of Italian Law No. 289 of 2002”; and b) “whether the execution of the related contract falls within the authority reserved for the City Council, since it entails an expenditure decision that affects budgets for subsequent financial years, pursuant to Article 42, paragraph 2, letter i) of the T.U.E.L.”.”
“… we can proceed with examining the issue … relating to the execution of derivatives, swaps and IRSs by public entities in general and local entities in particular”
“However, that does not fully solve the problem …, since we must – within the ambit of the path theoretically admissible – determine whether other limits exist on the lawfulness of those contractual types, for the Public Administration”
“There is still no solution for the general problems relating to the definiteness (or determinability) of the object [oggetto] of the contract.”
"In 9 they explained why they need to consider further limits. In the paragraphs which you have just mentioned, and I totally agree with you, 9.1 until 9.6 or 9.7 they return to the general analysis concerning all parties and then they go back to public authorities in 9.8. …the court is … at the same time is using two levels of analysis, a more general one concerning all parties, and a more specific one concerning local authorities. And that is made evident…"
“It's always useful for the starting point is: well, what do the words mean in isolation? If they have the meaning for which you contend in isolation you don't need to look elsewhere in the document. And if they don't have the meaning that they have it said in isolation, then one has to look for compelling reasons elsewhere in the document. … in isolation those words mean that. And the rest of the document doesn't help because the rest of the document is consistent with either reading. So we are left on English usage clearly in favour of our construction.”
“9.8. — Based on that analysis, …we must confirm the rule of law as follows: In regard to derivative contracts entered into by Italian Municipalities based on: (i) the laws in effect until 2013 (when Italian Law No. 147 of 2013 precluded any further use of them); and (ii) the distinction between hedging and speculative derivatives, based on the criterion of the different degree of risk of each of them,: Although local entities could enter into the former with qualified financial intermediaries, local entities could usefully and effectively do so only if the contractual object [oggetto] could be precisely measured/determined, including the mark to market criterion, probabilistic scenarios and the “hidden costs”. …..”
“9.8. — Based on that analysis, …we must confirm the rule of law as follows: In regard to derivative contracts entered into by Italian Municipalities based on the laws in effect until 2013 [(when Italian Law No. 147 of 2013 precluded any further use of them) and the distinction between hedging and speculative derivatives, based on the criterion of the different degree of risk of each of them], although local entities could enter into the former with qualified financial intermediaries, local entities could usefully and effectively do so only if the contractual object [oggetto] could should be precisely measured/determined, including the mark to market criterion, probabilistic scenarios and the “hidden costs”. ….”
“based on that analysis”
“This is to reduce to a minimum and make the entity aware of all of the aleatory aspects of the contract, since they are highly inconsistent with the rules relating to public finance and they introduce variables that are not compatible with the fixed nature of expenditure commitments shown in the financial statements.”
“Nor can it be argued that the significance of this decision is limited to the public administration sector when it deals with derivatives. All commentators argued for the general scope of many of the statements contained in the aforementioned decision, which, moreover, already qualifies as such on a first reading.”
“Hence, in light of the legal and axiological framework outlined above, we can arrive at a first conclusion, namely: Recognition of the Administration’s capacity to conclude derivative contracts, based on the law in effect until 2013 (when Italian Law No. 147 of 2013 precluded that possibility) and 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 could a local entity be said to have capacity to enter into them”
“The Transactions were speculative in that they involved the purchase of a financial instrument (viz the swaps) at an implied cost referable to the mark to market value at the time of acquisition. In relation to the interest rate aspect of the instruments, their value lay in the hope that they would turn out to have been worthwhile. In that sense they were speculative. In the premises the future value of the swap instruments was entirely dependent on uncertain future market movements.”
"….the following derivative transactions are also allowed:…; c) purchase of an interest rate cap in which the buyer is protected from increases in the interest rate payable above the set level; d) purchase an interest rate collar in which the buyer is guaranteed an interest rate to be paid, fluctuating within a predetermined minimum and maximum;…"
"The Defendant will say ... it is for the Claimant to identify and prove the statutory power (if any) pursuant to which it alleges that the Defendant had the capacity to enter into the Transactions."
“These: Article 41 of Law 448 and Article 3 of Ministerial Decree 389.”
"187 … As Professor Napolitano points out, the circular simply does not say this. What it says is translated as follows: The purchase of a collar implies the purchase of a cap and the contextual sale of a floor, permitted solely to finance the protection against an increase in interest rates furnished by the purchase of the cap. 188. Professor Napolitano had no difficulty in accepting that this passage in the circular represents Italian law. As he made plain in cross examination, what he could not discern was how either article 3.2(d) or the circular supported a suggested requirement that there must be equivalence or equilibrium between the value of the cap and the floor…. 190. I am persuaded by Professor Napolitano that Professor Sciarrone Alibrandi’s opinion in this regard does not represent Italian law. As Professor Napolitano observed in Napolitano 1, decree 389/2003 is concerned to implement article 41.1 of law 448/2001. Nothing in article 41.1 calls for an equivalence of the kind asserted by Professor Sciarrone Alibrandi. Moreover, as it seems to me, Dexia rightly adds that there is no inconsistency between the law on the one hand excluding the possibility of a local authority selling a floor on its own but on the other hand permitting the sale of a floor as part of a collar transaction even though the MTM of the floor is greater than the cap."
"There does not seem to me to be anything in Decree 389 which requires the cap and floor costs or values to be evenly balanced….If the validity of a derivative with a floor and a cap depends on an alignment of cap and floor values current at the date of the agreement – a question affording wide scope for argument — the result would appear unworkable."
"Q: … swaps are debt management instruments and not indebtedness? A: I agree with you that this is their function. Then we should consider how they are used, because there might be cases in which swaps are used as a sort of proxy to loans or to other forms of indebtedness. But I agree with you that as a matter of principle swaps are different."
"Authorisation for Italian Municipalities to conclude a swap contract, especially if they are of the type with an upfront loan, but also in all cases where its negotiation entails extinction of the previous underlying loan agreements or even if they remain outstanding, but with significant modifications, must be given…"
“The city council must evaluate the cost-effectiveness of the transactions that may constrain the use of future resources and make clear that the local entity’s transaction must follow the rules of public accounting that govern the carrying out of the responsibilities of entities that use public resources”
"The city council must evaluate the cost-effectiveness of transactions that may constrain the use of future resources and make clear that the local entity’s transaction must follow the rules of public accounting that govern the carrying out of the responsibilities of entities that use public resources."
"I also have sympathy with his submission that the general principle stated in Dicey, Morris & Collins would not be applied if it resulted in distinct unfairness or there were other strong reason for modifying it. An obvious example might be if an agent chose a law unconnected with the contract simply to clothe himself with authority."
“Accepting the view… that the Minister had no power under the regulations to grant a tenancy, it is perfectly manifest to my mind that he could not by estoppel give himself such power… It would entirely destroy the whole doctrine of ultra vires if it was possible for the donee of a statutory power to extend his power by creating an estoppel. That point, I think, can be shortly disposed of.’”
“[170] At para 35 above I set out the representations which are attributed to Haugesund in the ISDA Master Agreement. ... Wikborg Rein contends that these representations form the basis of an estoppel by representation pursuant to which the municipalities are, as against Depfa, precluded from denying that the swap agreements imposed on them valid and binding obligations. In the alternative, Wikborg Rein contend that the municipalities owed to Depfa a tortious duty of care in making the representations as to their power to enter into the agreements and that they made the misstatements negligently, so that in consequence Depfa has a cross-claim in damages against the municipalities to the extent of its inability to recover in contract or in restitution. … Both of these arguments must in my view fail on the simple ground pointed out by Professor Graver that “there can be no power under administrative law for public bodies themselves to create new powers by representing that they have such powers”
“[304] …. Mr Howe accepted that this is so in the case of local authorities or other public bodies, but submitted that Vestia are in a different position because, though they operate in the field of social housing, they are a private entity. [305] Professor Dorresteijn's evidence was that Vestia and other SHAs “are not part of the governmental organisations”, and I accept this. But I do not consider that this assists Credit Suisse, or that Vestia could have extended their contractual capacity by representing (by contract or otherwise) that they have powers which they do not have or that it is within their powers to make a contract when it is not. A contract that is ultra vires the powers of a company is void, and it cannot be validated: see Chitty on Contracts (31st ed, 2012) vol 1 at paras 9-020 and 9-024, citing the judgment of Russell J in York Corp v Henry Leetham & Sons[1924] 1 Ch 557 , 573, 22 LGR 371, 94 LJ Ch 159: “An ultra vires agreement cannot become intra vires by means of estoppel, lapse of time, ratification, acquiescence, or delay”
“nor [can] a company become entitled by estoppel to exceed its statutory powers or those given to it by its memorandum of association”
“Would the Additional Representations so interpreted be inconsistent with a policy or principle of law that an entity cannot expand its own capacity by estoppel or contract? In my judgment they would not be. I readily accept that an entity cannot achieve what it has no power to do simply by stating or promising that it has the power, and that underlying the doctrine of ultra vires is a policy of protecting the public: see Hazell v Hammersmith and Fulham LBC,[1992] 2 AC 1 , 36F/G per Lord Templeman. But there seems to me no reason that a legal entity should not in a valid contract undertake that the contract will not be used as a vehicle for purported transactions that are invalid because they are outside their capacity. Credit Suisse are not making a claim under the ultra vires contracts and in this part of their claim are not asserting that they are valid. Their argument is that they are entitled to enforce the Master Agreement as if the ultra vires contracts were valid.”
“A party who knows or should know the existence of a reason of invalidity of a contract and does not give notice to the other parties is bound to compensate for damages suffered by the latter relying, without fault, on the validity of the contract.”
“This Court believes that the issues above are of great importance …: apart from being of great relevance from a practical point of view, due to the concrete effects that the adopted solutions will have in the context of the litigation on derivatives between local bodies and financial intermediaries (a litigation that often involves very large sums of money), they relate to matters on which the Court of Auditors, in both its jurisdictional and administrative articulation, and the Council of State, have given conflicting responses. Therefore, the relevance of these issues arises from a scenario of serious uncertainty as it results from the decisions of the various judicial bodies that have dealt with them in auditing, accounting liability and selfprotection matters. This Court is obviously aware that in the case before it there are subjective rights involved, which were absent in the cases brought before the Court of Auditors and the Council of State; nonetheless, it thinks that there is a need to avoid in the future conflicting judgments by the first section of the Supreme Court on a fundamental topic for the interest of the local bodies and the banking and financial intermediaries, on which the signalled disagreements have already had an impact.”