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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Regione Piemonte v Dexia Crediop SpA [2014] EWCA Civ 1298 (09 October 2014)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2014/1298.html
Cite as: [2014] EWCA Civ 1298
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ON APPEAL FROM THE HIGH COURT QUEENS BENCH
COMMERCIAL COURT
Mr Justice Eder
Strand, London, WC2A 2LL |
||
B e f o r e :
LORD JUSTICE LEWISON
and
LORD JUSTICE CHRISTOPHER CLARKE
____________________
| Regione Piemonte |
Appellant |
|
| - and - |
||
| Dexia Crediop SpA |
Respondent |
____________________
Sonia Tolaney QC and James MacDonald (instructed by Cleary Gottlieb & Hamilton LLP) for the Respondent
Hearing dates: 21st and 22nd May 2014
Additional Written Submissions: 16th and 23rd July 2014
____________________
Crown Copyright ©
- On 16 November 2006 Regione Piemonte, the Italian Regional Authority (hereafter "Piedmont"), entered into certain derivative transactions (the "Transactions"), in connection with the issue by it of two bonds. Two of the Transactions were with Intesa Sanpaolo S.p.A ("Intesa") (previously named Banca Infrastrutture, Innovazione e Sviluppo S.p.A ("BIIS")) and one was with Dexia Crediop S.p.A ("Dexia") (together "the Banks"). The agreements for the Transactions provided that they were to be governed by English law and each party irrevocably submitted to the jurisdiction of the English Courts.
- In August 2011 the Banks brought two separate actions seeking declarations as to the validity of the Transactions ("the Declaratory Actions"). The proceedings were served on Piedmont. Piedmont did not file any Acknowledgment of Service. On 24 July 2012 Cooke J made the declarations sought ("the Cooke judgment"). In February 2013 the Banks brought new actions claiming substantial sums said to be due under the Transactions and sought summary judgment. Shortly before the hearing Piedmont applied to set aside the Cooke judgment. In July 2013 Eder J declined to do so and gave monetary judgments in favour of the Banks. The question in this appeal is whether he was in error in so doing.
- By a contract dated 24 October 2005 Piedmont entrusted Merrill Lynch International ("ML") and Dexia with the role of assisting it in order to obtain credit ratings from one or more specialist agencies. By clause 6 of the agreement neither of them was to receive payment and they were to bear the cost "relating to the issue of the initial issuer rating by specialist agencies chosen by the Region at its own discretion, which may not be challenged".
- On 14 November 2005 the Banks and ML submitted a joint proposal "for the provision of the services of financial transactions Arranger". This was their bid to provide Piedmont with their services (which they were to provide for free) in relation to the preparation of Euro Medium Term Notes Programmes. Thereafter they made various presentations of proposed strategies in respect of the Bond Issue: e.g. an extensive paper on 11 January 2006 putting forward a financing strategy and the reasons for it. This ended with a disclaimer that the Banks were acting as counterparties and not advisers or trustees (although the body of the paper said that the banks participated in the placement by supporting Piedmont and not as counterparties). These disclaimers were repeated on at least two other occasions. In the course of 2006 the Banks gave advice about the Bond and other aspects of the proposed Programme including the derivatives.
- On 2 August 2006, by Resolution 135-3655 the Giunta, i.e. the ruling council of Piedmont, authorised the preparation of the Euro Medium Term Note Programme for a maximum amount of 2 billion and appointed the Banks and ML as joint arrangers. The Resolution recorded that it was appropriate to approve the signing by Piedmont of framework agreements ISDA Master Agreements with Dexia and ML and Intesa "for the conclusion of derivative operations for the purposes of managing the interest rate risk and any other risks linked to the funding operation as well as for the purposes [of] recreating the effect of repayment".
- The Resolution authorised or decided inter alia the following:
- This programme provided for the issue of Notes in an aggregate amount of over
2 billion. I gratefully adopt the judge's description of the Transactions derived from the Banks' skeleton argument: - In respect of the Dexia and Intesa Transaction there was a side letter of 2 May 2007 which confirmed the last sentence quoted in [26] above and stated the value ascribed to the protection.
- In respect of the Interest Rate component of the 2036 Transaction, the cap on the rate that Piedmont might have to pay was 6% and the floor was 3.75%.
- In addition there was a further Transaction between Merrill Lynch International Bank Ltd, an Irish corporation, ("MLIB") and Piedmont on materially identical terms to those between Piedmont and Intesa so that MLIB paid by reference to 600 million in respect of the 2036 Transaction and 28 million (i.e. the other half of the
56 million) in respect of the 2013 Transaction. - The effect of these arrangements was (a) that the interest rate and amortization components covered the whole of the 2036 Bond ( 1.8 billion) and the 2013 Bond
( 56 million); and (b) that Piedmont would be a net payer if interest rates rose above the amount due under the Bonds, but never of more than the difference between those rates and the cap; and a net recipient if such rates fell, but never of more than the difference between those rates and the floor. - In respect of the amortising swap component the amount of Piedmont's fixed payments was not uniform but increased over time as appears from Schedule 2 to the Confirmation.
- In respect of the credit default swap the "Reference Obligation" was a 2037 4% Euro Bond issued by the Republic of Italy (the "reference Bond"): see part 3 (1) of the Confirmation of 2 May 2007. Credit Events were defined in the Confirmation as Failure to Pay, Restructuring and Repudiation /Moratorium (all of which are defined in the Credit Derivatives Definitions whose terms were incorporated in the Confirmation): see para 3 (4). The effect of section 7.3 of those Definitions and other provisions was that, in Dexia's case, Piedmont was, in effect, taken as having purchased a nominal amount of the reference Bond equal to the aggregate amount it had already paid or was due to pay to Dexia under the amortising swap at the time of default. If the reference Bond defaulted, Piedmont would owe Dexia that amount less the recovery value of the Bond. In effect Piedmont acquired a credit exposure economically similar to the exposure it would obtain if it used the amounts payable under the amortising swap to purchase the same actual amounts of the reference Bond.
- Unlike most credit default swaps the buyer of credit protection i.e. Dexia was not to make any payment to the seller of such protection i.e. Piedmont. Instead the value of the premium that Dexia would have paid was agreed to have been incorporated into the calculation of the amounts due from Piedmont under the interest rate swap: see Part 3 (2) of the Confirmation and para 1 of the Side Letter. Counsel for Piedmont informed the court that they were not in a position to accept whether this agreement reflected the true position, but there is no evidential basis for concluding that that which was agreed between the parties to be so did not represent the reality.
- The Transactions were performed until 2011. But in 2012 Piedmont stopped payment. According to the Banks' case the following payments were due under the Transaction documents on the following dates:
- The background to this non payment is as follows. On 5 October 2010 Dott Sergio Rolando became Piedmont's Head of Finance and took steps to have the Transactions investigated. On 6 October 2010 the Italian Corte dei Conti, which had oversight of Piedmont's financial affairs and is akin to a district auditor, produced a report which called for further study of the Transactions and their terms. As a result Piedmont obtained in 2011 a report dated 12 July 2011 from an Italian lawyer, Avvocato Tommaso Iaquinta of the Milan Bar, written with the assistance of a financial expert. That report is very long (92 pages in single spacing) and not easy to follow. It was provided to the Banks.
- I set out below a summary recorded by the judge, derived from the skeleton argument of Ms Newman QC, of what are said to be Avv Iaquinta's principal conclusions:
- In January 2011 reports began to appear in the Italian press indicating that Piedmont was contemplating action against the Banks and ML.
- On 10 August 2011 the Banks commenced separate proceedings in the Commercial Court against Piedmont, in which they sought declarations as to the validity of the relevant Transactions and the legal nature of their relationship with Piedmont. The proceedings were duly served by means of personal service on Piedmont at its offices in Turin on 30 January 2012. Piedmont did not enter any Acknowledgment of Service.
- Piedmont's failure to do so was neither accidental nor careless. In his statement Dott Rolando records that "... the Regione took the view that it was inappropriate to engage with litigation in England". It took that view because, as recommended by Avv Iaquinta, it had decided to make use of a process under Italian Law known as autotutela (self-redress). This process, if it worked, would, it was believed, enable Piedmont to have the Transactions declared void without the need to obtain a declaration from any court to that effect. The procedure was started by Resolution No 67-2399 issued on 22 July 2011.
- On 23 January 2012 the Giunta passed Resolution 24-3305. This purported to cancel Resolution 135-3655. On the same date Piedmont's Financial Resources Department passed Resolution No 3/2012 which purported to cancel three earlier resolutions approving Piedmont's subscription to the Transactions. In May 2012 Piedmont began to default on its obligations under the Transactions.
- The Banks filed proceedings with the Tribunale Amministrativo Regionale per il Piemonte (the "TARP") challenging, inter alia, the validity of what Piedmont had purported to do. They claimed that Piedmont's purported exercise of autotutela was in violation of Italian law since Piedmont's entry into the Transactions was a private law act and any dispute in relation to them should be determined by the English Courts.
- In England the Banks applied for default judgement. Since no Acknowledgement of Service had been filed the application was made without notice to Piedmont, supported by the affidavit of Mr Jonathan Kelly of Cleary Gottlieb, Steen & Hamilton LLP, which acted for the Banks.
- On 24 July 2012 Cooke J granted the declaratory relief sought being "entirely satisfied" that he had the necessary material upon which to make the relevant declarations and that Piedmont was aware of the claims. All but one of the declarations (number 9) reflected representations made in the terms of the Transactions. The ninth was vouched by the evidence of Mr Kelly. The declarations he made were these:
- The judgment and orders made by Cooke J were put in evidence as part of the Banks' defence in the Italian proceedings on 28 September 2012 and were provided to Piedmont at that time. They were also sent to Piedmont by registered post and fax on 23 October 2012. In addition they were certified, sealed and served on Piedmont on 24 January 2013 in conformity with the Italian rules as to service of foreign judgments.
- Meanwhile on 21 December 2012 the TARP delivered its judgment in the autotutela proceedings. It held that it had no jurisdiction and that the matter should be decided by the English Court (the "TARP Judgment"). Piedmont appealed.
- The Banks continued to perform their obligations under the Transactions at least in the sense that amounts due from them were set off against amounts due to them.
- Piedmont did not continue to perform its obligations. Accordingly the Banks instituted new proceedings on 11 and 22 February 2013 respectively (the "Money Actions"). These proceedings, claiming in excess of 36 million, were served on 4 March 2013. According to Dott Rolando it was the consequence of the TARP decision and the fact that the Money Actions had been served that caused Piedmont to consider engaging with the English proceedings. Piedmont acknowledged service but served no defence. On 5 April 2013 the Banks issued applications for summary judgment for the sums they alleged to be due contending that the Transactions were valid, binding and enforceable, as Cooke J had determined. By 2 April 2013 Piedmont had instructed English solicitors.
- The hearing before Eder J took place on 5 July 2013. No defence was filed before then. However on Friday 28 June 2013 Piedmont issued two application notices to set aside the judgment and orders in the Declaratory Actions. No evidence was then filed in support. On Monday 1 July 2013 the Banks received an unsigned and undated witness statement of Dott Rolando, accompanied by a 613 page exhibit including the Iaquinta Report, in support of Piedmont's application to set aside the judgment of Cooke J and in opposition to the Banks' application for summary judgment. The statement was signed on 4 July 2013. On 3 July 2013 Mr Kelly provided his first witness statement in support of the Banks' application for summary judgment and in response to Dott Rolando's statement.
- Piedmont submitted that there had been insufficient disclosure to Cooke J in that inadequate attention was drawn to the arguments that were available to Piedmont in relation to (a) its capacity to enter into the Transactions, (b) whether the Banks owed Piedmont a fiduciary duty, (c) the existence of a prior advisory relationship and (d) alleged secret profits arising from the imbalance between the floor and the cap, particularly when the Bank had had the Iaquinta Report. The judge accepted at [10] that some of the points that Piedmont sought to raise before him were not specifically drawn to the attention of the court. He did not however accept that there had been any relevant non-disclosure in that Cooke J had had the witness statement of Mr Kelly (which he had read) which revealed that Piedmont had purported to declare the resolutions approving entry into the Transactions as null and void by means of autotutela for the reasons contained in those Resolutions and that the Banks challenged that approach.
- In my view it was open to the judge to decline to set aside the default judgment on the ground of non-disclosure. It is true that the Banks possessed the Iaquinta Report but I do not regard it as incumbent on them to suggest what Avv Iaquinta had not said (see [85] [86] below), namely that there was, or might be, a freestanding case of capacity, independent of any question of autotutela. The judge was aware of the autotutela process, that there was a dispute as to its applicability, and that resolutions had been passed purporting to annul the resolutions which had approved Piedmont's entry into the Transaction on the grounds of violations of Italian Law. He was told in Mr Kelly's affidavit that the reasons were set out in the Resolutions which were exhibited. Piedmont had not at this stage raised any contention of breach of fiduciary duty.
- In the light of the submissions made to him and the fact that he had seen the Report and what Ms Newman said about it, it was pre-eminently for his discretion whether there was non-disclosure of a significance that should lead to the judgment being set aside.
- In [30] and [31] of his judgment the judge set out the provisions of CPR 13 and what, in broad terms, he accepted were the applicable principles:
- Subject to an important qualification I would accept this as a broad summary of the relevant principles. CPR 13 makes clear (i) that the power to set aside is discretionary; (ii) that the conditions specified in CPR 13 (1) (a) or (b) are necessary, but not necessarily sufficient, conditions for the exercise of the discretion; and (iii) that the question as to whether the application has been made promptly is a mandatory and obviously, therefore, important consideration. It follows that a court may be entitled to refuse to set a judgment aside even if the defendant shows a real prospect that he may or might succeed in his defence at trial.
- I, also, agree with the observation of the judge that there is no arbitrary time limit and that each case must ultimately depend on its own facts.
- The qualification is that it does not seem to me that the merits of any defence are ever irrelevant if by that the judge meant that the court will not even consider them. When it does consider them, it may conclude that they are of little or no weight. The court is engaged in an exercise of weighing delay against merits, which will include considering the nature and extent of the delay, the reason and any justification for it, the strength of the supposed defence and the justice of the case. The stronger the merits (and any justification for the delay) the more likely it is that the Court may be prepared to exercise its discretion to set aside a judgment regularly obtained despite the delay and vice versa. That is not to say that a real or even a good case on the merits will usually lead to the judgment being set aside despite significant delay since delay is now a much more potent factor than heretofore. If there is a marked and unjustified lack of promptness, that, itself, may now justify a refusal of relief because the delay is a factor that outweighs the defendants' prospect of success. As Moore Bick LJ recognised in Agrinvest the climate has changed with the introduction of the CPR from that which applied when this court in JH Rayner (Mincing Lane) Ltd v Cafenorte S.A. Importadora e Exportadora S.A. [1999] 2 Lloyds Rep 750 upheld a decision of his own setting aside a judgment after a delay of 7 ½ years.
- Eder J cited Agrinvest for the proposition that "a court may well be justified in refusing relief, notwithstanding the possibility that the defendant may well succeed", when the phrase Moore Bick LJ in fact used was "notwithstanding the possibility that the defendant might succeed at trial". I do not regard this as a significant error. The proposition can be stated using either the subjunctive or the optative provided it is recognised that the relative strength of the defence is to be weighed against the fact and nature of delay.
- A question arose at the hearing of the appeal as to the extent to which the principles laid down in Mitchell v News Group Newspapers Ltd [2014] 1 WLR 795 applied to applications to set aside a default judgement. Since the hearing this Court has given judgment in Denton v TH White Ltd [2014] EWCA Civ 906 and the parties have made written submissions on it. Neither case was concerned with applications to set aside a judgment.
- In essence Piedmont submits that the Mitchell/Denton principles do not apply to an application to set aside a default judgment. The majority in Denton considered that the Mitchell decision was correct to attribute a particular importance to the factors listed at CPR 3.9 (1) (a) (the need "for litigation to be conducted efficiently and at proportionate cost") and (b) (the need "to enforce compliance with rules, practice directions and orders") because the Civil Procedure Rule Committee had rejected a recommendation in the Review of Civil Litigation Costs Final Report that CPR 3.9.1 should be reworded so that 3.9.1 (b) read "the interests of justice in the particular case". But the Final Report did not propose any amendment to CPR 13.3 so that the reasoning of the majority in Denton does not apply to it. There is thus, it is submitted, no reason to conclude that the Mitchell/Denton principles apply to an application under CPR 13.3 or that promptness under CPR 13.3 should be regarded as anything more than a factor. I disagree.
- In my judgment the matter stands thus. CPR 13.3 requires an applicant to show that he has real prospects of a successful defence or some other good reason to set the judgement aside. If he does, the court's discretion is to be exercised in the light of all the circumstances and the overriding objective. The Court must have regard to all the factors it considers relevant of which promptness is both a mandatory and an important consideration. Since the overriding objective of the Rules is to enable the court to deal with cases justly and at proportionate cost, and since under the new CPR 1.1 (2) (f) the latter includes enforcing compliance with rules, practice directions and orders, the considerations set out in CPR 3.9 are to be taken into account: see Hussein v Birmingham City Council [2005] EWCA Civ 1570 per Chadwick LJ at [30]; Mid-East Sales v United Engineering and Trading Co (PVT) Ltd [2014] EWHC 1457 at [85]. So also is the approach to CPR 3.9 in Mitchell/Denton. The fact that the Court's judgment in Denton was reinforced by the fact that CPR 3.9 was not reworded in the manner proposed by Jackson LJ does not detract from the relevance of CPR 3.9, and what was said about it in Denton, to applications under CPR 13.
- Denton makes clear that any application for relief against sanctions involves considering (i) the seriousness and significance of the default (ii) the reason for it and (iii) all the circumstances of the case. At the third stage factors (a) and (b) in CPR 3.9 are of particular, but not paramount, importance.
- The judge concluded that the delay in making the applications to set aside the Cooke judgment was both significant and serious and, of itself, sufficient to justify their dismissal. In any event he was not persuaded that Piedmont had any real prospect of success or that there was any other good reason for setting aside the judgment of Cooke J.
- As to the delay, he held that Piedmont had failed to act promptly to seek to set aside and that such delay was a very strong factor in favour of dismissing the applications. The Claim forms in the Declaratory Actions were served in January 2012, some 17 months before the hearing before him, and for most of the time since then Piedmont had taken a deliberate decision to ignore the proceedings. He rejected Ms Newman's submission that that was a reasonable decision to take because of (i) the view taken in Avv Iaquinta's report, (ii) advice received from the Corte dei Conti that Italian local authorities should exercise their self-redress powers and (iii) because the validity of autotutela was a question of Italian law. In his view a defendant who deliberately ignored proceedings duly instituted and properly served did so at his peril, particularly where that defendant had expressly agreed on English law and jurisdiction to govern the relationship. Whatever merits might exist in the self-redress process provided no justification for the decision of Piedmont to ignore the Declaratory Actions.
- The judge was fully entitled to take the views expressed in the previous paragraph. The delay was sizeable; and its character provided cogent reason not to exercise the discretion in Piedmont's favour. Piedmont had irrevocably agreed to the application of English law and the jurisdiction of the English Courts. On advice from Italian (but not English) lawyers it made a deliberate decision not to engage with litigation, of which it had proper notice, validly brought in an English court whose jurisdiction it did not seek to challenge or stay, and whose determination it did not seek to adjourn. It did so because it thought (wrongly) that it could achieve the result it sought by an Italian law administrative procedure and thereby avoid English jurisdiction. When that failed, and after a further five months delay following the notification to it of the decision in January 2013 (described by the judge as "wholly unacceptable") it finally got round to applying to set aside the judgment of Cooke J very shortly before the hearing of the Banks' application for summary judgment. It does not appear to have taken any advice about the English proceedings until April 2013.
- I do not accept that the judge gave inappropriate weight to the fact that Piedmont deliberately decided not to engage with the litigation. Nor do I regard Piedmont's want of familiarity with English court process as a redeeming feature. It could always have taken advice. It is, also, apparent from reading the Claim form that judgment might be entered if there was no acknowledgment. The fact that the delay did not itself disrupt future hearing dates does not reduce its seriousness. The approach taken by Piedmont has, in any event, caused delay and cost, and used up considerable court resources. If the judgment were to be set aside the proceedings before Cooke J will have been futile.
- On 23 July 2013 Piedmont's appeal was referred to the Consiglio di Stato.
- On 25 July 2013 Eder J refused permission to appeal from his judgment. On 6 September 2013 Piedmont renewed its application for permission to appeal on paper. It also produced a defence and the first and second witness statements of Avv Iaquinta signed on that day, the first asserting that the Dexia Transaction was outside Piedmont's capacity and void ab initio and the second being made in support of the application for a stay.
- On 4 October 2013 Floyd LJ refused Piedmont permission to appeal but stayed the operation of para 2 of the order of Eder J until after judgment on any renewed application. On 8 November 2013 Moore Bick LJ heard Piedmont's renewed oral application for permission to appeal and to rely on Avv Iaquinta's witness statement. He adjourned these applications to a hearing by the Full Court (with the appeal to be heard at the same hearing, if permission was granted) and continued the stay until after judgment on Piedmont's application for permission or further order.
- MLIB had, itself, issued proceedings in the Commercial Court on 12 February 2011 claiming a declaration as to the validity, binding nature and enforceability of the derivatives into which it had entered. Piedmont challenged the jurisdiction but did not proceed with the application, which was rejected by Gloster J on 27 January 2012. Piedmont was ordered to file an Acknowledgment of Service but failed to do so. MLIB applied for judgment in default and on 22 June 2012 the Court made the declarations sought. MLIB had also taken part in proceedings in the TARP which on 23 May 2103 had determined that the autotutela resolutions had been issued "in absolute lack of power" and declared that it lacked jurisdiction in respect of appeal to it by both Piedmont and MLIB.
- On 21 June 2013 Piedmont settled with ML and MLIB. As we now know, the settlement provided for MLIB to pay Piedmont, without admission of liability,
8 million within 5 business days after payment by Piedmont of the amounts due under the derivative on 27 May and 27 November 2012 and 27 May 2013. In addition the parties agreed to explore the possibility of some sort of guarantee to MLIB in respect of the swaps. If that was agreed and the guarantee established within two years MLIB was to make a payment to be agreed, that amount not to exceed 7,625,000. - Under paragraph 4 of the agreement Piedmont:
- Recital Q to the agreement recorded that the parties intended to settle "any and all disputes and claims regarding the MLIB Derivatives together with any and all disputes and claims regarding the matters referred [to] in these recitals, and at the same time to restore the effectiveness of the contracts themselves, in accordance with the settlement agreement..."
- On 17 December 2013 Intesa and Piedmont entered into a settlement agreement. By that agreement the parties expressly agreed that the Swaps were "valid, binding and enforceable ab origine pursuant to the regulations applicable to them" (2.2) and that the ISDA Master Agreement "shall remain" fully valid and enforceable (underlining added). Piedmont agreed to pay Intesa 19,423,898.19 by 7 January 2014 being the arrears due from it under the Transactions plus interest up to 27 November 2013. The parties also undertook to make all payments due under the Swaps from the Signature Date of the agreement until their natural maturity date and "to fully respect the provisions of each document connected and/or associated with the Swaps". Intesa agreed to provide a new lending rate to an associated company of Piedmont in respect of a number of current accounts applicable from 1 January 2014 to 31 December 2019 the value of which we were told was about 8 million. In addition the parties reached the same agreement as in the case of ML/MLIB in relation to a possible guarantee save that the maximum to be paid was 7 million. Each party agreed to withdraw all legal disputes.
- On 5 May 2014 the Consiglio di Stato ("CdS") dismissed Piedmont's appeal from the decision of the TARP.
- Piedmont applied to admit in evidence the first witness statement of Avv Iaquinta of 6 September 2013. We declined to do so since, in our view, it was not, as alleged, merely clarificatory of what Avv Iaquinta had said in his Report and did not satisfy the first test in Ladd v Marshall [1954] 1 WLR 1489 - that the evidence could not have been obtained with reasonable diligence at the trial. As a result we declined Dexia's application to admit the report of Professor Napolitano of 7 February 2014 which Dexia invited us to admit in evidence, if we admitted Avv Iaquinta's statement. We also declined to admit the report of Professor Renna (who had been retained by Piedmont to conduct its case in the CdS) of 12 May 2014 in response to the report of Professor Napolitano.
- Prior to the hearing of the appeal Piedmont had refused to disclose the settlement agreements between it and ML/MLIB and Intesa on the grounds of confidentiality. Piedmont's supplemental skeleton referred to the Intesa agreement but said that its authors had not seen it on the basis of instructions that it was unlawful under Italian law for them (or us) to do so. On the first day of the hearing 21 May 2014 - we ordered Piedmont to disclose and permit inspection of both agreements by 14:00 and they did so. As it happened, by a decision of 23 May 2014 the TARP held that Dexia was entitled to access to the Settlement Agreement and its related documentation (with the exception of any legal opinions) as a matter of public law principle and ordered Piedmont to allow them to review and make copies of it.
- We also refused applications to adduce the third statements of Mr Kelly and of Avv Iaquinta. These dealt with the Merrill and Intesa settlement agreements, the production of which we had ordered, in the light of which they were no longer necessary. We also declined to admit the witness statement of Samir Belarbi of 7 February 2014, the Head of Derivatives and Debt Management at Dexia, which dealt with the calculation of sums due, and the fourth witness statement of Avv Iaquinta which did not dispute Mr Belarbi's calculations but added a calculation of what would theoretically have been due from Piedmont in November 2011 and May 2012 under the amortising swaps alone. These statements appeared to us to be unnecessary for our purposes.
- We admitted, without objection, the report of the decision of the Consiglio di Stato of 5 May 2014.
- The appeal thus falls to be determined on the basis of the evidence before the judge, supplemented by the decision of the CdS and the two settlement agreements.
- The judge, not surprisingly, regarded Piedmont's failure to provide a draft defence as most unsatisfactory, as it was[3]. He described the evidence relied on as "at best, sketchy in the extreme". Dott Rolando had identified [in para 67] a number of "points of concern, which may well feature in its Defence in due course" as follows:
- As the judge held, these points of concern were advanced in a most unsatisfactory way. They were inchoate and tentative. Against that background the judge considered Piedmont's putative defences.
- Ms Newman had submitted to the judge that there were "a number of grounds for thinking" that Piedmont lacked capacity to enter into the Transactions so that they were void, a matter which is to be determined according to Italian law: JP Morgan Chase Bank NA v Berliner Verkehrsbetriebe (BVG) AOR [2012] QB 176 at [4]. If Piedmont did lack capacity to enter into the Transactions, it would, of course, be unable to rely on any contractual estoppel since there would be no contract on which to found it.
- The judge accepted that the question of capacity must be considered in relation to the particular transaction in question and its specific features (the interest rate swap, the cap, the floor, the amortising swap and the credit default swap) but held, that, even putting Piedmont's case at its highest, the evidence did not establish any sufficiently arguable case of lack of capacity. He regarded the points raised by Avv Iaquinta and Dott Rolando as centred on alleged inequalities of bargaining power, alleged reliance on the Banks' judgment and alleged representations, and an alleged failure properly to understand the terms of the Transaction. None of those points seemed to him to go to "capacity" as such but rather to "internal management corporate powers", an expression used by Cooke J in July 2012. Ms Newman submitted that this expression was wholly unclear but I take it to mean the exercise of powers which could be the subject of a self-redress remedy, which is the context in which Cooke J used the expression, as opposed to the powers of a corporation in the sense of that which it had capacity to do.
- The judge accepted that the fact that the court had declared that the Transactions were valid and binding, when Piedmont submitted that under Italian law it lacked capacity to enter into them, would pose issues of comity and that such circumstances might constitute a "good reason" to set aside the judgment but he did not consider that the evidence and arguments advanced justified setting the judgment aside.
- Piedmont's arguments on capacity relate to a series of Italian legislative provisions and interpretive guidance promulgated between 2001 and 2004 with a view to permitting public authorities to take steps to facilitate access to the capital markets. The provisions conferred wide powers on such authorities to execute derivative transactions subject to some express limitations. The principal provisions are:
- In HSH Nordbank AG v Intesa Sanpaolo SpA [2014] EWHC 142 (Comm) Burton J explained the background to these provisions as follows:
- Article 41 provides:
- Decree 389 is headed "Rules on access to capital markets by provinces, municipalities, etc. as per article 41, Law No 448 of December 28, 2001". After a large number of recitals the decree adopts a number of rules including the following:
- The Circular provides, inter alia, as follows:
- There are two essential questions: first, whether Piedmont was in breach of any relevant Italian law in entering into the Transactions or any part thereof; second, whether, if it was, that has the effect in Italian law that Piedmont lacked capacity to enter into them.
- The judge referred to the points raised by Avv Iaquinta but did not address the first question in his judgment in terms. I shall now do so by reference to the language of the provisions.
- Piedmont claims that the Dexia Transaction, in breach of Article 41, did not create a "containment of the costs of the debt". The Article is, however, drafted so as to indicate that the Ministry coordinates access to capital markets by Italian authorities with a view to containing the cost of debt i.e. to indicate the purpose for which the Ministry acts. The Article, itself, does not specify or limit the type of derivatives which may be approved, nor indicate that they must successfully contain the debt if they are to be valid.
- What "containment of the costs of the debt" covers is not wholly clear to me. An interest rate swap which provides for a cap operates so as to contain the cost of debt, since the effect of the cap is to limit the amount that the authority may have to pay to raise the funds to service the debt, although the effect of the swap is that Piedmont may pay out more overall under the Bond and the swap together than under the Bond alone. It does not seem to me possible to read "containment" as meaning that, at the date of the swap contract, its predicted effect on expiry of the Bond to which it related was that the cost of the debt to Piedmont would be no more than the coupon on the Bond.
- Next it is said that, in breach of Decree 389 Article 3 (2) (f) the amortizing swap component entailed a shift of Piedmont's payment obligations into the future since the quantum of each payment increases over the lifetime of the Bond. Piedmont says that this is inconsistent with the aim of spreading the load over the whole of the term of the Transaction and avoiding substantial payments concentrated in a short period. However, Article 2 of Decree 389 contains no provision relating to the payment profile of amortising swaps. It provides for the conclusion of "a swap for debt amortisation ... with intermediaries with appropriate credit rating". Insofar as reliance is placed on Article 3 (2) (f), it would appear to be misplaced since the transaction is already permitted under Article 2.
- Avv Iaquinta's report contends that, in breach of Decree 389 the interest rate floor had a greater notional cost to Piedmont than the value of the interest cap so that the collar, i.e. the cap and floor considered together, were not "par" instruments, meaning, as I understand it, the present value of the anticipated payments and receipts by each party over the life of the derivative is such that neither party is a net gainer. 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. Piedmont relied on a passage in the Circular (which is not a legislative instrument but sets out guidelines), which reads:
- At a later page of the Report Avv Iaquinta contends that the derivatives as non par instruments are in open violation of the provision in Annex 3 of Regulation 11522 (which implemented the provisions of Decree 24/2/98 No 58 which regulated the conduct of financial markets in 96 articles with 8 annexes).
- This appears to be a reference to the passage in a Part headed "The riskiness of investments in derivative financial instruments" under the sub heading "4.1 Swap contracts" which includes amongst other warnings the following:
- Nothing in that warning appears to me to provide that the collar must be a par instrument in the sense intended, as opposed to a warning that, whilst at the beginning of the contract the payments to be exchanged will be such that there is no sum to be paid either way, the derivative may quickly produce a profit or a loss. Nor does it provide that the fact of any imbalance makes the contract invalid.
- Next it is said that the synthetic investment component of the Dexia Transaction is not permitted by Decree 389. In this respect Piedmont seems to me on somewhat stronger ground. The effect of the Investment Component of the Transactions was that in the event that the Republic of Italy defaulted on the reference Bond Piedmont was to be taken to have purchased a nominal amount of that Bond equal to the aggregate amount that it had paid or was due to pay to the Banks and MLIB under the amortising swap and to pay that amount less the recovery value of the Bond.
- Dexia contended that such an arrangement is covered by Article 2.2 of Decree 389 which allows the amount set aside in the sinking fund to be invested in securities issued by the public administrations of European Union countries. The effect of the swap is to invest (synthetically) the amortisation fund in such securities.
- The difficulty with that argument is that Article 41, para 2 distinguishes between a sinking fund created at the moment of issuance of the bond and a swap contract for the amortization of the debt. Article 2.2 of the Decree would appear to relate to that fund. There would seem to me, therefore, a real prospect that, as a matter of Italian Law, Article 41 and the Decree do not in terms authorise this aspect of the Transactions, even though, so far as the principal is concerned the risk of the credit default swap and an actual investment in Italy's bond is the same.
- Dexia also contended that such an arrangement was covered by Article 3.2. (f) as some "other derivative product [] aimed at restructuring debt", on the basis that the credit default swap formed part of an arrangement for restructuring debt because its existence reduced the price of the interest rate swap. It is not, however, clear that (f) covers a derivative which, of itself, does not have that aim, but whose existence reduces the price of one that does.
- I am conscious that in examining the provisions set out above I have been looking at them through English eyes. In his report Avv Iaquinta refers to multiple violations of the regulations, including (a) non containment of the cost of the debt [988] contrary to Law 448 ("the reverse is true with mechanisms designed to push this cost upwards"); and (b) the imbalance between floor and cap contrary to Decree 389 as interpreted by the Circular [988] and Annex 3 [990]. In relation to the former I find his meaning obscure. In relation to the latter he refers [961] to a decision of the Court of Milan (see [97] below), which appears to have interpreted para 4.1 of Annex 3 as requiring a par instrument in the sense intended by Piedmont. I would be minded to accept that, in relation to the latter, there is a real prospect of Piedmont showing a violation of the regulations.
- As to want of capacity, Piedmont's case is unpromising for a number of reasons.
- First, the provisions referred to above were considered in Avv Iaquinta's report. In his concluding pages he said that all practical options should be evaluated including early termination (sic) of Derivative Contracts and judicial petitions for "possible condemnation". He advised that the most valid and effective instrument available would be to exercise the powers of autotutela. An action in England carried the risk that standards designed by the national legislature to safeguard local governments would be ignored. Recourse to the ordinary Italian courts was even less advisable, on the basis that they might decline jurisdiction in favour of England. He referred to Article 21 nonies of Law 241 of 7 August 1990 as the appropriate provision whereby an illegal administrative act could be "withdrawn from the system retrospectively", the effect of which would be to "draw [the Transactions] into the mainstream of national administrative jurisdiction".
- He did not, however, conclude that Piedmont lacked legal capacity to enter into them. The matters which he relied on were said to constitute a "violation of the regulations". Ms Newman submitted that a careful reading of the report shows that he was claiming that Piedmont lacked 'capacity' but, as it seems to me it is in Piedmont's skeleton argument and submissions that the violations are claimed to carry with them a want of capacity.
- Ms Newman submitted that under English law a public body lacks capacity to enter into a contract save in accordance with public law obligations and for a proper purpose and that, absent evidence that Italian law is different we should apply English law. I do not accept this. English law is or may not be as clear cut as that: see Charles Terence Estates Ltd v Cornwall Council [2012] EWCA Civ 1 WLR 466 and the discussion in Chitty Supplement 10.32. In Charles Terence the Court highlighted (a) the distinction between an action being ultra vires or a breach of duty in the public law sense and the separate and different question of want of capacity in private law; and (b) the error of taking terminology from administrative law and applying it without adjustment to private law; and held that even if two statutory corporations were in breach of fiduciary duties the grant by them of leases was not a nullity.
- In addition, I do not regard it as acceptable for someone who seeks to set aside a default judgement regularly obtained, and who relies on the provisions of foreign law, to adduce evidence on supposed invalidity under that law, and then, when such evidence falls short of establishing want of capacity, to seek to repair the omission by submitting that it must be assumed to be the same as that of England. This is particularly so in respect of a doctrine such as the ultra vires doctrine or concepts of voidness/ voidability which civil law countries may not necessarily adopt or use in the same way.
- Second, in his evidence before the judge Dott Rolando identified a "concern" by Piedmont that the Transactions did not comply with "a number of requirements of Italian law" and stated his understanding that Italian law issues arose in relation to Piedmont's capacity to enter into the Transactions which "may" have the effect that Piedmont did not have capacity to execute them. He did not state that he had been advised by any lawyer that it did have that effect.
- Third, Piedmont has now settled with both ML/MLIB and Intesa with whom it had agreements materially identical to its agreement with Dexia. In the former case Piedmont "finally acknowledges and agrees the full validity, effectiveness and enforceability of the MLIB Derivatives in all their aspects and provisions": para 4. In the latter, where Avv Iaquinta is a signatory, the parties agreed that the swaps were "valid, binding and enforceable ab origine pursuant to the regulations applicable to them": para 2.2.
- I find it difficult to see how such agreements, particularly the latter, are reconcilable with the proposition that the Transactions were void ab initio (or could not legally be performed) or how they could have been cured of any such defect by the expedient of some payment in money or money's worth, nor has any satisfactory explanation been given. The structure of the swaps remains in place (including the amortizing component and the credit default swap); and Piedmont was to make payment of arrears and remain liable for future payments. In the Intesa settlement it is agreed that no provision in the Agreement shall render invalid payments made for the swaps prior to signature 2.6 (i). The payments to be made to Piedmont by MLIB and the value provided by Intesa, leaving aside payments which might be made if any guarantees were agreed, are nowhere near one third of the alleged secret profit. Further the declaratory judgment in MLIB's favour as to the validity of the Transactions has not been overturned.
- Fourth, both the TARP and the CdS have (see [94] below) ruled against Piedmont in the autotutela proceedings. Before Moore Bick LJ it was said that the appeal to the latter was very significant and would deal with the capacity issue[4]. In the event the CdS has held that Piedmont's purported exercise of the autotutela remedy was invalid because the entry into the derivative transactions was not an administrative act carried out in an administrative (public law) capacity which could be cancelled by way of autotutela on the grounds that it was an unlawful act of a public body. Piedmont entered into the Transactions in its private law capacity as it confirmed in section 3 (j) (ii) of the Agreement whereby it represented and warranted that "the execution, delivery and performance of this Agreement by it constitute private and commercial acts rather than governmental and public acts".
- In essence the TARP held that the autotutela purportedly exercised was not in relation to faults in the administrative proceedings pre contract but in relation to alleged genetic (sic) or functional faults of the contractual relationship which had been characterised by Piedmont on the suggestion of its legal consultant (semble Avv Iaquinta) as "faults of legitimacy" of Piedmont's actions "solely for the purposes of providing a basis for jurisdiction in the administrative judge, avoiding that of the English court, as had been agreed": para 5. The relationship of the parties was of "an essentially civil nature, deriving from the conclusion of contracts". The dispute as to validity was "eminently [one] of private law". The choice of the specific swap contracts and the definition of their conditions resulted from negotiations of a private nature, conducted by the parties outside any public and open procedure. Piedmont's attempts to annul Resolution 135-3655 "express no more than the will of the administration to unilaterally dissolve a contractual tie regarded as invalid". The validity of the legal transaction should be pronounced upon by the English judge. The administrative judge lacked jurisdiction.
- The Adunanza Plenaria (a plenary session of 13 judges) of the CdS upheld the TARP. The judgment makes plain that the Court did not regard the process of entering into derivative contracts as having been the subject of any form of public tender procedure (3.2), as compared with the procedure that was launched to select the banking institution to entrust with placing the Bond. Nor did it think that there had been any precursor acts ("atti prodromici") that might give rise to administrative court jurisdiction. None of the alleged defects of legality said to justify the autotutela process applied to resolution no 135-3655 itself as opposed to the derivative contract later entered into (4.3). The purported nullification was "merely an artifice that fails to obscure the fact that the matter at issue in the present dispute does not consist of reviewing the legality of a sovereign act ...un atto di imperio) but rather a judgment on the merits of the defects attributed to the agreements, an issue which falls outside the administrative jurisdiction ..."
- It is apparent from this judgment that the Italian Courts did not regard Piedmont as lacking capacity in administrative law terms to enter into the Transactions or as being entitled under that law to annul, retrospectively or prospectively, any relevant administrative act. Entry into the Transactions was not an administrative act so there was nothing with which autotutela could engage.
- In those circumstances there does not seem to me, on the evidence, any real prospect of Piedmont establishing that it lacked capacity to enter into the Transactions, or that they were or have become void. Its case had been put on the basis that under Italian administrative law it could establish that that was so and that case has failed. The proposition that, if the public law autotutela process failed, then as a matter of private law, Piedmont in any event lacked capacity to enter into the Transactions is not the case that was articulated by Avv Iaquinta's report. Nor is any suggestion to be found in the decision of the TARP and the CdS that, when the English courts considered the validity of the contracts, they would have to proceed on the basis that Piedmont had no capacity to enter into them.
- In her reply Ms Newman directed our attention to a reference on page 42 of Avv Iaquinta's report, not previously referred to in the present case, where the Court of Milan (it is not clear what sort of Court) is said to have "sanctioned the nullity of non-par swap contracts signed in violation of Decree 389 [and] the Circular and Regulation 115222" (this is a reference to the provision of Annex 3 referred to in [76] above) "even if they are already extinct by choice of the parties". It is not clear by what law the "extinct" contract was governed or what exactly sanctioning nullity meant (although it is said to have involved ordering a reimbursement by the bank of payments issued). The court appears to have treated a non par contract as a breach of Annex 3. She also referred us to a decision of the Court of Pescara referred to on page 44 of the Report which is said to have confirmed that the use of derivative instruments for Territorial Entities was permitted "only in order to cover debts and on condition that the precise limits designed for containing risk are respected under penalty of nullity of the related contracts". No reports of the cases are before us. Both antedate the TARP and CdS judgments in this case.
- I am not persuaded that, in light of the matters set out in the preceding paragraphs, this late entrant into the argument affords a real prospect of Piedmont establishing want of capacity, and certainly not any prospect of sufficient cogency to justify setting aside.
- Piedmont also contends that the English court should refuse to enforce the contracts since they are illegal under the law of a friendly nation on the grounds of public policy of universal application: Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd [1988] QB 448,461; or because performance of the contract is forbidden by the law of the place where it must be performed: Ralli Bro v Companie Naviera [1920] 2 KB 287, 292, 296 and 300. Piedmont's skeleton argument before Eder J referred to Avv Iaquinta's report as claiming that it was unlawful for Piedmont to enter into the Derivatives: but neither of these cases appear to have been cited to him.
- Lemenda Trading is a case of an English law contract to be performed in Qatar, which related to an adventure (the procurement of the renewal of an oil supply contract by an intermediary using his influence over the managing director of the Qatar General Petroleum Co without the latter's knowledge of the intermediary's pecuniary interest) which was contrary to the public policy of both England and Qatar (where such a contract would be void). The decision rests on the judge's finding that the adventure was against the public policy of both nations. It does not seem to me that Piedmont has on the evidence a realistic prospect of persuading the English Court that the performance of the Transactions is contrary to English public policy. Further if the contracts are ones into which Piedmont had the capacity to enter, whose validity is for the English Courts to decide, the evidence does not establish, nor does it appear to have been submitted to the judge, that there was some separate head of Italian public policy which would render the Transactions unenforceable. Nor, on the evidence does there seem to me sufficient ground to suppose that, even if Piedmont had the capacity to enter into these English law contracts, nevertheless as a matter of Italian law Piedmont could not lawfully pay out under them.
- Piedmont also contends that the credit default swaps were not authorised by Resolution 135-3655 (as the judge had held) and that Dexia (and Intesa) ought to have known that the officers of Piedmont did not have authority to enter into derivatives which were so manifestly dangerous. This does not appear to me to be a realistic line of defence either. Dr Rolando did not refer to want of authority and it did not feature in Piedmont's skeleton argument before Eder J. Resolution 135-3655 authorised a repayment swap together with other operations in derivatives such as an interest rate swap or other operations that are appropriate for the management of risk related to the funding operation. A credit default swap which improved the terms of an interest rate swap would appear to me to fall within that definition. The Resolution identified the Banks and Merrills as counterparties and authorised the Manager of the Finance Department to sign the ISDA Master Agreement contract and to negotiate and complete the derivative operations referred to in the Resolution which might be appropriate to the bond issue.
- In any event Piedmont represented to the Banks (a) that it had the power to execute that Agreement and any other documentation relating to it to which it was a party and to perform the obligations under the Agreement and had taken all necessary action to authorise such execution and performance; and (b) that its obligations under the Agreements constituted its legal valid and binding obligations enforceable in accordance with their terms. These provisions are contained the ISDA Master Agreement which Resolution 135-3655 authorised see in paras 3 (a) (ii) and (v). In those circumstances Piedmont is contractually estopped from asserting the contrary.
- Piedmont contended that, as a matter of public policy, the court should be wary of making, and astute to set aside, declarations made in default which might conflict with the laws of Italy (a friendly foreign State) as to the validity of Piedmont's actions, or which might appear to sanction a breach of those laws. In the light of the fact that the CdS has decided that the issue between the parties should be decided in England, there can be no breach of comity (or of public policy) in the English Court doing so or in applying its own procedural rules and practices. Counsel for Piedmont submits that, since the CdS has determined that the case is one for the English Courts, it must have expected that the English Courts would do so and that was a good reason to allow the matter to proceed to trial. If the default judgment was allowed to stand the Italian courts may, she submitted, consider that procedure has taken over from justice.
- I do not agree. Since the judgment and orders of Cooke J formed part of the Banks defence in the Italian proceedings, the Italian courts must be taken to have known that the English Court had already reached a decision. Further, the effect of the CdS' decision is that the dispute between the parties was never one which justified resort to autotutela and was always one which fell to be determined in the English court whose jurisdiction the parties had accepted. In those circumstances there was no justification for Piedmont's disengagement from these proceedings and these seems to me no good reason why the English Court should, for comity reasons, feel inhibited from declining to set the default judgment aside if not satisfied that there are sufficiently cogent grounds for doing so.
- Piedmont also contended that there would be grave consequences to Piedmont and its officers if they were to make payments under the Derivatives when it was unlawful under Italian law for them to do so. There was no evidence to that effect before the judge. Piedmont submits that such a result is obvious. It does not seem to me (a) that it is at all obvious what consequences are likely to follow (other than an obligation to make payments in accordance with the judgment of the English court) or (b) that the court should decline to set aside a judgment regularly obtained against an Italian regional authority because, if executed, there may be consequences for those who participated in the making of the relevant contract; particularly where, as here, there is no evidence as to what exactly those consequences are likely to be.
- Ms Newman had submitted that the Banks occupied the status of "trusted advisors" and thus owed fiduciary duties to Piedmont. In so doing she had, as the judge recorded, relied on a number of matters including (i) a particular presentation made in September 2006, when there was no disclaimer; (ii) the 2005 contract whereby the Banks and ML agreed to act as "Ratings Advisors", and (iii) the role played by the Banks as arranger of the Bonds on Piedmont's behalf and giver of advice in relation to the Loan Programme including the derivatives. Dott Rolando's evidence refers to his perception that the Banks had a close relationship with the Giunta member responsible for finance and his predecessor, who treated them as advisors; and to Piedmont's personnel being flown to London business class and put up in grand hotels in Paris and elsewhere in connection with a road show to promote the Bond at the Banks' expense. Ms Newman also relied on the fact that Dr Lesca, Piedmont's Head of Finance at the time (he retired in 2010) spoke very limited English and so, it is said, could not be expected to understand the complex agreements into which Piedmont was entering. Accordingly, it was submitted, the Bank owed Piedmont a duty to make full disclosure of the "secret profits" made by it and to obtain Piedmont's informed consent thereto. Further the Banks incorrectly advised Piedmont that as a matter of Italian law it had no option but to enter into the Transactions if it wished to issue the Bonds. This raised further questions as to whether Piedmont executed the Transaction as a result of misrepresentation or undue influence.
- The judge rejected these submissions. There was, he held, no proper evidence before the court to support the submission that the Banks undertook the role of fiduciaries at any rate in relation to the Transactions. The fact that three Banks acted as principals pointed strongly against their undertaking any such role.
- The representation case was derived from paragraph 19 of Dott Rolando's statement where he said that Dr. Lesca had told him that at a particular meeting one Antonio Miele, a manager from Merrill Lynch stated that the banks were not prepared to go ahead with issuing the Bonds unless they provided for a bullet repayment and that "the Banks were also saying that in addition to a bullet bond it was obligatory for the Regione to enter into an amortising swap" when there was no such obligation. As to that the judge did not regard this evidence as "suggesting that the Banks were in effect representing what Piedmont were obliged to do as a matter of Italian law (which seems to me inherently unlikely in any event) but rather stating the Bank's own position as to what they were or were not prepared to do although Ms Newman informed me that her understanding on instructions at least was the former not the latter". He also regarded this alleged oral representation as carrying no real weight. It had never been alleged before; no contemporaneous material supported it; and there was no evidence of reliance. In my judgment he was entitled to take that view, particularly in the absence of evidence from Dr Lesca and in circumstances where Piedmont was advised by two firms of Italian lawyers.
- In any event, as he rightly said, the Banks were entitled to rely on the principle in Springwell Navigation Corporation v JP Morgan Chase Bank & Ors [2010] EWCA Civ 482 "to the effect that representations such as those made by Piedmont in the Master Agreement give rise to a contractual estoppel which prevents the representor from setting up a different version of the facts from those represented", as Cooke J had summarised the position in paragraph 16 of his judgement. The representations contained in the contractual documentation include a representation that Piedmont was not relying on any communication from the Banks as investment advice or as a recommendation to enter into this Transaction: see Part 4 para 4 of the Confirmation of 2 May 2007.
- Ms Newman had submitted that the Transactions had a very substantial negative overall cost to Piedmont such that, properly advised, Piedmont either could not have entered into the Transactions (having no power to do so) or should not have entered into them save for a very substantial premium of 54,382,796 from the Banks. This, as I understand it, is said to represent the negative value of the Agreement, including the difference between the value of the floor and the cap (in the Banks' favour) as at its date.
- The judge regarded the submission that the Transaction had generated "secret profits" as one made without any proper basis. He indicated that he did not fully understand the calculations contained in the report of Avv Iaquinta (in which he is not alone) but observed that on their face they had been performed by reference to the terms of the Transactions themselves. If they did indeed give rise to a very substantial negative value it did not follow, he held, that these constituted "hidden costs" to Piedmont or "secret profits" to the Banks. To get this argument off the ground it would be necessary to consider the entire package including the risk involved for both the Banks and Piedmont over the life of the Transactions. There was no independent evidence that, properly advised, Piedmont could not have entered into the Transactions at all or should only have done so in return for a very substantial premium. In any event the claim depended on the premise that the Banks were in the position of fiduciaries and in breach of their fiduciary duty, which he did not accept.
- I do not regard the judge as in material error in his decision in relation to fiduciary duty and secret profits. As to the latter, what essentially appears to be being said is that, if you take the terms of the interest rate swap, and, in particular the collar, all of which terms are apparent, you will, using a valuation of the floor and cap as at the date of the agreement, produce a negative value which was not declared by the Banks to Piedmont. This is then characterised as a secret profit or a secret commission.
- I do not regard the characterisation as accurate. The negative value relied on is in reality an assessment, on the basis of some model, of how at inception it is estimated the contract will turn out over its very long term. Piedmont may not have had the model at the time (although I do not see why they could not have had access to one) but it does not seem to me obligatory on the Banks to disclose any negative value produced by them.
- As to the fiduciary relationship, there seems to me to be no real prospect and certainly not one of sufficient weight to justify setting aside the judgment of Cooke J after this delay of successfully asserting that the Banks were fiduciaries in respect of the Transactions and liable to account for the so called secret profit.
- The Transactions involved the Banks and Piedmont acting as principals swapping payments calculated on different bases, which, as the judge held, points strongly against the Banks undertaking a fiduciary role in which they would be required to subordinate their interests to that of Piedmont. Ms Newman submitted that the judge was in error in refusing to accept that Piedmont was not a sophisticated entity, as Cooke J had described it. I do not agree. He was entitled to rely on the fact that it was a major regional authority with access to two firms of Italian lawyers by whom it was in fact being advised and the means of access to English ones. Even if Piedmont lacked experience of derivatives, it was acting as a major player in raising some
2 billion. - The parties agreed with each other in respect of the Transactions that the documents constituted the entire agreement and understanding between them. In addition Piedmont agreed (i) that it was acting on its own account; (ii) that it made its own independent decisions; (iii) that it did not rely on any communications of the Banks as investment advice; and (iv) that it was capable of assessing the merits of and understanding (on its own or through independent advisors if need be) the terms of the Transactions, the relevant risk factors and the nature and extent of the risk of loss. If that was the agreement between them as to the assumptions on which they would do business I find it impossible, or at least very difficult, to say that for the purposes of the Transactions the Banks are to be treated as fiduciaries. Further in respect of all those matters (which are statements of fact rather than characterisations of a relationship) I can see no basis upon which a Springwell estoppel would not operate. I note that one of the representations in that case was that Springwell "had not relied and acknowledges that neither CMSCA nor CMIL has made any representation or warranty with respect to the advisability of purchasing" the relevant Notes.
- Piedmont contends that a fiduciary cannot rely upon a contractual estoppel to the effect that he is not one. Eder J did not find it necessary to decide this issue. Nor do I. It may be that someone in a category where a fiduciary relationship is presumed (trustees, solicitors, agents etc) or who would otherwise be regarded as a fiduciary cannot escape being treated as one by a term that simply says that that is not what he is.
- But that begs the question whether or not the person in question is otherwise subject to a fiduciary obligation (and, therefore, a fiduciary), for which purpose it is necessary to look at, inter alia, the agreement between the parties as to what is to be the basis of their relationship.
- Piedmont seeks to say that the Banks were fiduciaries by January 2006, and could not avoid their fiduciary duties by resigning from their fiduciary position by making the November 2006 agreements, and that the terms said to give rise to a contractual estoppel cannot be relied upon because of the provisions of the Unfair Contract Terms Act. As to these arguments, which were not made before the judge, the former appears to me a mischaracterisation. If and insofar as the banks occupied a fiduciary position in early 2006 they were not resigning in order to retain a profit derived from it, or denied to them if they remained in it; but entering into a new and different contractual relationship for the future (until 2037) on defined terms in circumstances where it was obvious that they might make a profit out of it or suffer a loss. As to the latter, the liability relied on is not one in contract, and, in any event, the prospects of striking down the terms of a commercial contract of this kind are poor.
- Under this head Ms Newman had relied on the evidence about Piedmont being told that it was obligatory to enter into an amortising swap if it wished to issue the Bonds dealt with above. She also advanced a broader case alleging that the Transactions had been missold. The judge regarded her basis for these allegations as vague and obscure and involving an amalgam of other parts of her submission. To the extent that any of the points relied on went beyond what he had already addressed he did not consider that they provided Piedmont with any real prospect of success. It seems to me that he was entitled to take that view, particularly in the light of the Springwell estoppel to which I have referred and the absence of any evidence from Dr Lesca.
- Ms Newman had submitted that the Transactions were only suitable for a "qualified investor" and referred for this purpose to Article 31.2 of an Italian Regulation - the CONSOB[5] Regulation No 11522 of 1 July 2008 as amended, which defines them. She said there was no evidence before Cooke J that Piedmont was in fact such an investor and the court was simply invited to proceed on the basis of contractual provisions drafted by the Banks representing that this was the case. In fact Piedmont had no experience of derivatives and relied on the Banks for advice. She told the judge that if the matter proceeded to trial Piedmont anticipated calling evidence from its former Head of Finance, Dr Lesca, to the effect that he was told by a representative of the Banks not to worry about this requirement since by entering into the Transaction, Piedmont would automatically become a "qualified investor". This was absurd: if the term was to have any meaning it must be a precondition to entry into a derivative contract that Piedmont was such an investor.
- The judge said (correctly) that there was again no proper evidence of this representation; no draft defence signed with a statement of truth and no evidence from Dr Lesca as to the alleged representation. To rely on evidence of events long ago which Piedmont anticipated calling was inadequate on an application of this kind. Further the Banks had obtained in default a declaration that Piedmont was a qualified investor within Article 31.2 in accordance with the representation contained in Part 4 4 (B) (c) of the Confirmations dated 25 March and 2 May 2007. Absent positive evidence to the contrary the judge said that he was not persuaded that Piedmont did not fall within the scope of that Article. But, in any event he could see no reason why the relevant terms of the Transactions did not give rise to a contractual estoppel in accordance with Springwell. Nor can I.
- The point made in respect of qualified investors does not relate to capacity. Article 31.1 provides that, subject to certain exceptions, "in the relationships between authorised intermediaries and professional investors" a number of enumerated provisions, which relate, inter alia, to disclosures that are required to be given to counterparties, shall not apply. Article 31.2 then defines what is meant by "professional investors". These include "...entities that issue financial instruments traded in regulated markers..." which the judge thought possibly applied to the Transactions although he accepted that that was entirely speculative.
- Even if Piedmont was not a qualified or professional investor that does not mean that it lacked capacity to enter into the Transactions.
- As to quantum the judge had evidence from Mr Kelly as to the amounts due. He declined to accede to Ms Newman's invitation for an adjournment to consider the calculation of sums which had been set out in Particulars of Claim signed with a statement of truth and served on 5 March 2013. Nor was he obliged to do so. I do not accept that, as suggested, the Claim form only claimed the amounts due under the amortizing swap.
- I do not regard Piedmont as having established that the judge's refusal to set aside the default judgment or his grant of summary judgment on the monetary claims were in error. Whilst in limited respects I have found that there was a realistic prospect of establishing non-compliance with Italian law that is not sufficient to justify setting aside the judgment. In my view the extent and character of the delay alone afforded, in this case, good grounds to refuse to set the judgment aside even if the defence had a real prospect of success. In the light of the character and extent of that delay it would require a defence of some considerable cogency, based on pretty convincing evidence, particularly on the question of capacity, to justify setting the default judgment aside. The judge was entitled to take the view that there was no real prospect of Piedmont succeeding or, at any rate, none with a sufficient degree of conviction to justify setting aside the default judgment in the circumstances of the present case.
- I would, therefore, refuse Piedmont permission to appeal against Eder J's judgment.
- I agree.
- I agree.
LORD JUSTICE CHRISTOPHER CLARKE
The issue
The history
"12 ...
Repayment method: repayment, according to a repayment plan or, if appropriate, in a single instalment on final maturity. In the case of repayment in a single instalment on final maturity, a derivative operation will be activated in accordance with the provisions of article 41 of law 448/2001 and ministerial decree 389/2003, which allows the Region to recreate a repayment effect through the stipulation of a repayment swap, providing for the setting up of adequate guarantees in favour of the Region;
Other operations in derivatives: any interest rate swap operations for the management of risk arising from interest rate trends or other operations that are appropriate for the management of risks related to the funding operation;
14) to stress that these issues must be in line with the parameters and requirements of national and regional laws, and with reference to the latter, in particular to the provisions of the Regional Financial Law for the year 2006 and article 41, paragraph 2 of law 448/2001;
19) to appoint [the Banks and ML] as Joint Lead Managers and Joint Bookrunners for the bond issue;
21) to identify as counterparties for any derivative operation [the Banks and ML (or companies belonging to the ML group)], banks of proven national and international standing with adequate credit worthiness and a rating higher than single "A", at the conditions and according to the terms which will be agreed from time to time between [Piedmont and the Banks and ML]
28) to award a mandate to the Manager of the Finance Department for these purposes, attributing to him the broadest powers... (d) to negotiate and sign the "ISDA Master Agreement" contracts, and to negotiate and complete, within the framework of this contract, the derivative operations examined in the resolution, which might be appropriate to the bond issue."
The Euro Medium Term Note Programme
"20 ... Piedmont issued two bonds viz (i) the first in the amount 1.8 billion repayable in a single "bullet" payment in 2036 (the "2036 Bond"); and (ii) the second in the amount of 56 million repayable in a single "bullet" payment in 2013 (the "2013 Bond"). Also on 16 November 2006, the Banks and Piedmont entered into the Transactions viz (i) Dexia and Intesa each (respectively) entered into a derivative transaction in connection with the 2036 Bond (each a "2036 Transaction" and together the "2036 Transactions"); and (ii) Intesa also entered into a derivative transaction in connection with the 2013 Bond (the "2013 Transaction"). Dexia and Piedmont did not enter into any derivative transaction in connection with the 2013 Bond.
21 Each of the Transactions was concluded in the standard ISDA form. Accordingly, their terms are contained in the following documents (together, the "Transaction Documents"):
i) As regards the Dexia 2036 Transaction: an ISDA Master Agreement dated as of 16 November 2006 and a Schedule thereto; the 2000 ISDA Definitions and the 2003 ISDA Credit Derivatives Definitions (as supplemented by the May 2003 Supplement); and a confirmation dated 2 May 2007 (the "Dexia 2036 Transaction Documents").
ii) As regards the Intesa 2036 Transaction: an ISDA Master Agreement dated as of 16 November 2006 and a Schedule thereto; the 2000 ISDA Definitions and the 2003 ISDA Credit Derivatives Definitions (as supplemented by the May 2003 Supplement); and a confirmation dated 26 March 2007 (the "BIIS 2036 Transaction Documents").
iii) As regards the 2013 Transaction: an ISDA Master Agreement and a Schedule thereto; the 2000 ISDA Definitions and the 2003 ISDA Credit Derivatives Definitions (as supplemented by the May 2003 Supplement); and a confirmation dated 2 May 2007 (the "2013 Transaction Documents").
22 The Transaction Documents contain clauses pursuant to which the parties expressly agreed that English law would govern each of the Transactions and that the English Court would have exclusive[1] jurisdiction over disputes relating to each of the Transactions.
23 Each of the Transactions has three components, which can be described as the Interest Rate Component, the Amortisation Component, and the Investment Component.
24 First, the Interest Rate Component is in respect of each of the Transactions an interest rate derivative under which:
i) In respect of the 2036 Transactions, Dexia and Intesa respectively exchange with Piedmont floating rate payments calculated by reference to EURIBOR on 27 May and 27 November each year until 2036. The floating rate payments to be made by Dexia and Intesa are equal to a total of two-thirds (one-third for each of Dexia and Intesa respectively) of the semi-annual interest coupons payable by Piedmont on the 2036 Bond, whereas the floating rate payments to be made by Piedmont are subject to a 'cap' above which they cannot rise and a 'floor' below which they cannot fall (the cap and the floor together constituting a 'collar')[2].
ii) In respect of the 2013 Transaction, Intesa and Piedmont exchange fixed and floating rate payments calculated by reference to EURIBOR yearly until 2013. Intesa pays to Piedmont an amount calculated by applying a fixed rate of 4.094% to a notional amount of 28 million equal to half of the amount of the coupon payable by Piedmont to bondholders on the 2013 Bond. In return, the floating rate payments to be made by Piedmont are subject to a 'cap' above which they cannot rise and a 'floor' below which they cannot fall (the cap and the floor together constituting a 'collar').
iii) Accordingly, the effect of the Interest Rate Component in respect of each Transaction is to limit the interest rate risk to which Piedmont is exposed under the 2036 Bond or 2013 Bond to the range between the floor and the cap.
25 Second, the Amortisation Component of each of the Transactions
provides:
i) In respect of the 2036 Transactions, for Piedmont to make fixed payments to Dexia and Intesa respectively on 27 May and 27 November each year which, over the life of the 2036 Transactions total two-thirds of the principal amount of the 2036 Bond (600 million). In return, upon the termination of the 2036 Transactions in 2036 Dexia and Intesa are each obliged to pay 600 million to Piedmont, which (it is envisaged) will be used by Piedmont partially to fund the repayment of the 2036 Bond.
ii) In respect of the 2013 Transaction, for Piedmont to make a yearly fixed payment to Intesa which, over the life of the 2013 Transactions totals one half of the principal amount of the 2013 Bond (28 million). In return, upon the termination of the 2013 Transaction in 2013 Intesa is obliged to pay 28 million to Piedmont, which (it is envisaged) will be used by Piedmont partially to fund the repayment of the 2013 Bond.
iii) Accordingly, the effect of the Amortisation Component of each of the Transactions is to create an accreting fund from which Piedmont can meet part of its future debt obligations under the 2013 Bond and the 2036 Bond. "
26 Third and finally, the Investment Component of each of the Transactions provides for Piedmont to make a derivative-based (or 'synthetic') investment in bonds issued by the Republic of Italy by selling credit protection in relation to such bonds to the Banks. The Banks do not make any payments in exchange for this protection, but the value of the protection is reflected in the amounts of the parties' respective payment obligations under the Interest Rate and Amortisation Components of the Transactions."
Performance of the Transactions
Due to Intesa
28/5/2012 6,984,662.30 on the Intesa 2036 Transaction
27/11/2012 4,011,772.33 on the 2013 Transaction and
9,323,175.85 on the Intesa 2036 Transaction
Total 20,319,610.48
Due to Dexia
27/5/2012 6,984,662.30
27/11/2012 9,323,175.86
Total 16,307,838.16
The Iaquinta Report
"(1) The Derivatives do not create a "containment of the costs of the debt" incurred by [Piedmont] in issuing the Bonds, contrary to requirements of Italian Law. Instead, they force [Piedmont] to pay out sums on account of its liabilities under the Bonds which are higher than those actually payable under the Bonds.
(2) The amortising swaps had the effect of shifting [Piedmont's] payment commitments into the future (because the payments due under the amortising swaps increase greatly as time goes by), contrary to requirements of Italian Law.
(3) The interest rate floors had a greater notional cost to [Piedmont] than the value of the interest rate caps (albeit that these values were not disclosed to [Piedmont] by the Banks or approved by Piedmont at any time), meaning that the interest rate collars were not "par" instruments, contrary to requirements of Italian Law.
(4) The notional cost to [Piedmont] of the interest rate floors was in excess of market rates at the time of execution of the Derivatives, whereas the notional premium being received by [Piedmont] through entering into the interest rate caps was below market rates at the time.
(5) [Applies to the smaller Bond].
(6) The credit default swaps, which amount to the sale by [Piedmont] of insurance against the Italian state defaulting on its debts, are not instruments which [Piedmont] had capacity under Italian Law to enter into, and exposed [Piedmont] to a considerable financial risk.
(7) Analysed as a whole, the Derivatives had hidden costs to [Piedmont] of
54,382,796 (and consequential hidden profits to Cs in the same amount), which violated various provisions of Italian Law."
The proceedings
The judgment of Cooke J
"(1) The Transactions Documents (as defined in Schedule A to this Order) and the terms contained therein, as well as all other written agreements and/or written notifications and/or documents entered into and/or executed by the parties prior or pursuant to or related to or in connection with the Transaction Documents and/or the Transactions (as defined in Schedule A to this Order) are and/or were at all material time valid, binding and enforceable.
(2) The Defendant's obligations under the Transactions constitute its legal, valid and binding obligations, enforceable in accordance with their terms.
(3) The Transaction Documents constitute the entire agreement and understanding of the parties with respect to the Transactions and supersede all oral communications and prior writings with respect thereto.
(4) In entering into the Transactions, the Defendant acted on its own account, made its own independent decisions and judgments, did not rely and is estopped from contending that it did rely on any communication (written or oral) of the Claimant as investment advice or as a recommendation to enter into the Transactions, it being understood that (a) information and explanations relating to the terms and conditions of the Transactions would not be considered investment advice or as a recommendation to enter into the Transactions; and (b) no communication (written or oral) received from the Claimant would be deemed to be an assurance or guarantee as to the expected results of the Transactions.
(5) In entering into the Transactions, the Defendant was acting for the purposes of managing its borrowings or investments and not for the purposes of speculation, and that the Transaction was suitable for the hedging purposes connected with the underlying debt.
(6) Prior to and when entering into the Transactions, the defendant was capable of assessing the merits of and understanding (on its own behalf or through independent professional advice) the terms of the Transactions, the relevant risk factors, the nature and extent of the risk of loss and the nature of the contractual relationship into which it was entering.
(7) The Claimant did not act, and the defendant did not consider the Claimant to be acting, as a fiduciary or adviser in respect of the Transactions.
(8) The Defendant was, when entering into the Transactions, a qualified investor for the purposes of Article 31, second paragraph of CONSOB Regulation No 11522 of 1 July 1998, as amended and supplemented.
(9) The Claimant has to date fully complied with and/or discharged each and all its relevant obligations under the Transactions Documents."
The TARP judgment
The hearing before Eder J
The application to set aside the judgment of Cooke J
Non disclosure
The test for setting aside
"30 CPR 13 provides in material part as follows: "(1) the court may set aside or vary a judgment entered under Part 12 if (a) the defendant has a real prospect of successfully defending the claim; or (b) it appears to the court that there is some other good reason why (i) the judgment should be set aside or varied; or (ii) the defendant should be allowed to defend the claim.(2) In considering whether to set aside or vary a judgment entered under Part 12, the matters to which the court must have regard include whether the person seeking to set aside the judgment made an application to do so promptly."
31 As to this, Ms Tolaney submitted that the applicable principles are, in summary, as follows:
i) The court's power to set aside a default judgment pursuant to CPR 13.3 is discretionary.
ii) The burden rests upon the defendant to satisfy the court that there is good reason why a judgment regularly obtained should be set aside: ED&F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472. Furthermore, depriving the claimant of a regular judgment which the claimant has validly obtained in accordance with CPR 12 is not something which the court will do lightly.
iii) In particular, CPR 13.3(2) gives added emphasis to the need for a defendant to show that it has acted "promptly" in seeking to set aside. More specifically:
a) "Promptly" in this context means "with alacrity" or "with all reasonable celerity in the circumstances": Regency Rolls Ltd v Carnall [2000] EWCA Civ 379.
b) Promptness will always be a factor of considerable significance and, if there has been a marked failure to make the application promptly, a court may well be justified in refusing relief, notwithstanding the possibility that the defendant may well succeed at trial: Standard Bank plc v Agrinvest International Inc [2010] EWCA Civ 1400 per Moore-Bick LJ at [22].
c) It follows that, by contrast with the test for summary judgment under CPR 24, under CPR 13.3 the merits of any proposed defence are just a factor which can be taken into account and an unimportant or irrelevant factor where the failure to act promptly is particularly egregious.
d) Promptness is such an important factor because of the public interest in the finality of litigation, the need under the CPR to act expeditiously, and the requirement to have regard to the proper allocation of courts' resources: Mullock v Price [2009] EWCA Civ 1222, per Ward LJ at [28].
iv) As regards the time period in which applications have been deemed to be "prompt", the limit appears to be some way short of the 11 months that have elapsed in this case. Thus, 30 days has been deemed to be too long: Khan v Edgbaston Holdings [2007] EWHC 2444 (QB), per HHJ Coulson QC. It has been suggested that 59 days is "very much at the outer limit of what could possibly be acceptable": Hart Investments v Fidler [2006] EWHC 2857"
The effect of Mitchell
Events after Eder J's judgment
The settlement with Merrill
"...finally acknowledges and agrees the full validity, effectiveness and enforceability of the MLIB Derivatives in all their aspects and provisions. The Region undertakes therefore not to challenge the T.A.R judgment and not to bring any objections in relation to the MLIB Derivatives, at the same time irrevocably waiving every challenge actual and/or potential relating to the legitimacy, validity and/or effectiveness both of the MLIB Derivatives and of the deeds to them connected and prodromal (even by way of autotutela) in the parts exclusively related to ML, including the 36 Decree."
The settlement with Intesa
The judgment of the Consiglio di Stato
Fresh evidence
The merits of Piedmont's defence
"(1) The Regione had next to no experience of bond issues and no experience of derivatives at the time when it executed the Derivatives. It had previously issued one bond for a relatively small amount (almost 445 million euros), but there were no derivatives associated with that bond.
(2) In contrast, the Banks had considerable expertise in derivatives. The Regione treated the Banks as its advisors concerning the Bonds and the Derivatives. The Banks had a close relationship with individuals at the Regione.
(3) The Regione understood that the Banks regarded it as their client, rather than as an arms length party to a commercial transaction. That was reflected in the resolution of the Giunta appointing Merrill Lynch and Dexia as the Regione's Ratings Advisors. That was also reflected, the Regione believes, in the way in which the Regione's personnel were entertained at the expense of the Banks when the transaction documents relating to the Bonds and the Derivatives came to be signed. The Regione does not know how the Banks treated the Regione internally, i.e. whether they treated it as a client or a counterparty.
(4) The Regione is seeking to investigate how it was that Merrill Lynch and Dexia came to be appointed to act as rating advisors to the Regione, and why they agreed to act in this role without payment. In this context the Regione is also seeking to investigate the close relationship between individuals at the Banks and members of the Regione's Giunta at the time, with a view to ascertaining the extent to which the Regione relied on the Banks as advisors in executing the Derivatives.
(5) The Regione relied on the Banks, and believes that the Banks knew that and were content for the Regione to do so. The Regione believes that disclaimers to the contrary included in documents prepared by the Banks did not reflect reality.
(6) The true costs of the Derivatives were not disclosed to the Regione, and raise questions as to whether the Banks breached fiduciary duties owed to the Regione or whether the Regione lacked capacity to enter into the Derivatives as a matter of Italian Law.
(7) The derivative contracts were inappropriately complex for the Regione's purposes, and no serious attempt was made to ensure the Regione understood them. The documents were signed in English, by an Italian speaker.
(8) The Regione could have sourced finance at comparable rates from local lenders specialising in loans to public authorities. It is unclear why it did not do so. Even if a bond was beneficial in some way, the derivative contracts associated with the bond issues were entirely unnecessary. Italian legal requirements provide that a local authority issuing a bond repayable as a "bullet" must either establish a sinking fund or enter into an amortising swap. It appears that there was no benefit to the Regione of entering into an amortising swap, and that it would have been better served by a sinking fund. The Banks, however, represented that an amortising swap was not just desirable but obligatory.
(9) The Derivatives, taken as a package, had a significant negative value. Adopting market rates from the time, the Regione ought to have received a premium in the region of 54 million in return for entering into them. It may well be the case that the Banks entered into linked derivative contracts hedging against the risks of the derivative contracts which they had entered into with the Regione, and received significant premiums for so doing. No disclosure has been given of this, or of any bonus payments arising out of the transactions."
Capacity
The Italian law provisions
a) Article 41 of Law No 488/201 of 28 December 2001 ("Article 41")
b) Articles 1-3 of Decree 389/2003 of 1 December 2003 ("Decree 389") as interpreted by
c) A Circular issued on 27 May 2004 by the Ministry of Economy and Finance (the "Circular").
"4 Before the introduction of Law No. 448 of 28 December 2001 ("Financial Law 2002"), the ability of Italian municipalities to borrow from private sector institutions was strictly limited. Financial Law 2002 liberalised the rules governing the financing of municipalities, while not removing all of the restrictions on borrowing previously in place. In addition to such liberalisation, Financial Law 2002 for the first time expressly permitted municipalities to enter into derivative contracts to lower their borrowing costs. Article 41 of Financial Law 2002 provided that a Ministerial decree was to be issued by the MEF, to set out the rules under which municipalities could use derivatives to manage their financial positions. In the exercise of this power, the MEF issued Decree 389 of 1 December 2003 ("Decree 389"), which in Article 3 sets out the permissible derivative transactions. The MEF also issued an explanatory Circular dated 27 May 2004 ("the Circular") in order to "clarify certain aspects regarding interpretation necessary for the correct application of provisions" contained in Decree 389. It is common ground that the MEF both controlled and supervised the compliance of derivative transactions with Decree 389."
"1 In order to contain the cost of debt and to monitor public finance developments, the Ministry of Economy and Finance coordinates access to capital market of provinces, municipalities ... as well as consortia of local government 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 Ministry of Economy and Finance .The same decree approves the rules on debt depreciation and on the use of derivatives by the above entities.
2 The bodies referred to in para 1 may issue bonds with the reimbursement of capital in a lump sum on expiry , subject to the creation at the moment of issuance of a fund for amortizing the debt, or subject to the conclusion of swap contracts for the amortization of the debt "
"2 Amortisation
1 Contracts for the management of a sinking fund of outstanding principal or, alternatively, to conclude a swap for debt amortization, mentioned in article 41, paragraph 2, Law No 448 of December 28 2001, may be concluded only with intermediaries with appropriate credit rating, as certified by internationally recognised rating agencies.
2 The amounts set aside in the sinking fund may be invested only in securities issued by the public administrations and entities as well as companies with public participation by European Union countries.
3 Derivative transactions
1 If borrowing transactions are in currencies other than the euro, coverage of the exchange rate risk must be provided through exchange rate swaps .
2 In addition to the transactions referred to in paragraph 1 of this article and article 2 of this decree, the following derivative transaction are also to be 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
..
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;
.
f) other derivative products aimed at restructuring debt, only if they do not have a maturity subsequent to that of the underlying liabilities. These operations 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 liabilities."
"Transactions in derivative financial instruments (Art 3)
The types of derivatives transactions allowed, in addition to cross currency swaps to cover the exchange risk in the case of indebtedness in currency, are those expressly indicated in points a) to d) intended in the "plain vanilla" form. The purchase of a collar implies the purchase of a cap and the contractual sale of a floor permitted solely to finance the protection against an increase in interest rates furnished by the purchase of the cap. The level of the rate to be paid to the agency once the limits are met must be consistent with both the current market rates and with the cost of indebtedness prior to the derivatives transaction,"
The questions
Article 41
Decree 389
"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 rate furnished by the purchaser of the cap"
That does not appear to me to require the collar to be a par instrument, much less to provide that, if it is not, the transaction is invalid. The valuation of a floor or a cap is no exact science; and depends on a number of assumptions and/or complex mathematical formulae or models, of which there are several, predicting what may be a long term future. 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.
"The swap value is always zero upon the conclusion of the contract, but it may quickly acquire a negative (or positive) value, according to the yardstick linked to the contract.
The investor, before entering into a contract, should be sure he has understood how quickly the variations of the reference yardstick mirror the assessment of the spreads he will pay or receive."
Capacity
The TARP
The Consiglio di Stato
Illegality
Authority
Comity
Fiduciary duties
Secret Profits
Misselling
Not a qualified investor
Quantum
Conclusion
Lord Justice Lewison
Lord Justice Jackson
Note 1 Clause 15 (b) does not use the word exclusive but provides that the parties irrevocably submit to English jurisdiction. [Back] Note 2 These payments are calculated on the amounts in Schedule 1 which for each of them, decrease from
600,000,000 over the life of the contract: see Schedule 1. [Back] Note 3 Piedmont says that it lacked time to prepare any defence, in part because of the slowness of Italian local authority procedures one result of which was that the period from 4 April to 25 May 2013 was taken up agreeing the terms of instructions of solicitors and passing the necessary resolutions required for the instructions to take effect. This is scant excuse in the circumstances. [Back] Note 4 the proceedings ... are now going to a full plenary session of the highest Italian appellate administrative court, we say should and will deal with capacity, even though the first instance administrative tribunal dealt with the issue of capacity
. [Back] Note 5 Commissione Nazionale per le Societΰ e la Borsa - the Italian Securities and Exchange Commission. [Back]