England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE WALKER

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/06/2017

Introduction

1. In the Palazzo Comunale in the Tuscan town of Prato, there hangs a magnificent portrait by Alessandro Allori of Francesco Datini, better known to English visitors since the publication of Iris Origo's book as the Merchant of Prato. He is depicted in an overgarment of scarlet cloth, the commodity for which Prato was well-known (and indeed pre-eminent) in the Middle Ages. He was himself an elected Councillor of the Comune and is usually regarded as the founder of the city's prosperity. His statue stands outside the Palazzo holding a sheaf of bills of exchange. On the first page of each of his ledgers were the words "In the name of God and of profit", but he left his fortune to the city rather than the church. The Comune di Prato ("Prato") is still in existence as an Italian local authority but one feels that the facts of this appeal would cause the Merchant some dismay, because from 1996 onwards its finances had become under considerable pressure. As at 31^st December 2001 its total borrowing stood at around €111m. 88% of that figure was at a fixed interest rate whilst the remaining 12% was at a variable rate.
2. Concerned at its level of debt, Prato sought ways of managing its liabilities. On 24^th April 2002 it issued a tender notice for the appointment of a financial adviser, and on 22^nd May 2002 it set up a technical committee to consider and evaluate the seven tenders received. This committee consisted of 3 employees of Prato, Ms Graziella de Castelli, who was Prato's manager of Financial Resources between 1996 and 2007, Ms Rappuoli and Ms Belli and 3 external advisers who had drafted the tender notice, Professor Nigro and Professor Bompani (both Professors of economics) and a former senior banker in the person of Signor D'Agliana. One of the tenders came from Dexia Crediop S.p.A. ("Dexia") an Italian bank; in that tender Dexia recommended the use of derivative transactions for hedging against interest rate risk. The external members of the committee recommended that such transactions should not be for longer than 5 years and Dexia revised its proposal accordingly. By resolution of 25^th July 2002 the committee decided to recommend the appointment of Dexia as Prato's adviser and this was duly done.
3. On 23^rd November 2002 Dexia and Prato signed an ISDA Master Agreement the terms of which were incorporated into the subsequent swap contracts.
4. Interest rate swap contracts were then entered into between Dexia and Prato as a method of restructuring Prato's debt. The first swap was entered into by Dexia's acceptance of Prato's irrevocable proposal on 4^th December 2002. Dexia paid €165,000 to Prato as a premium and entered into a back-to-back hedging agreement with an associated company in France.
5. Swap 1 was terminated by Swap 2 which was agreed by Dexia's acceptance of Prato's irrevocable proposal on 6^th August 2003. On the same day, Swap 3 was also entered into. Dexia entered back-to-back contracts with Deutsche Bank and Morgan Stanley in respect of these swaps.
6. On 30^th December 2004 Dexia accepted irrevocable proposals to enter into Swaps 4 and 5 which would complement a bond issue from Prato, all of those bonds having been acquired by Dexia in private placements. Swaps 4 and 5 unwound Swap 2. Dexia entered back-to-back agreements with Deutsche Bank in respect of these swaps.
7. In the early part of 2006 Prato became liable to pay sums due under Swap 3 and asked Dexia for assistance in restructuring that transaction. In June 2006 there was email communication between them and on 14^th June there was a meeting at which a proposed bond and swap restructuring was approved.
8. On 29^th June 2006 Dexia accepted Prato's irrevocable proposal of the previous day to enter into Swap 6 which had the effect of cancelling all other existing swaps, namely Swaps 3, 4 and 5. In a document sent by Dexia to Prato on 17^th October 2007 the mark to market ("MTM") value to Prato of Swap 6 was said to be negative €5.205m.
9. From Prato's point of view, all went well with Swap 6 until June 2009, when for the first time, as a result of the 2008 financial crisis, Prato had to make a payment to Dexia. It made payments due in December 2009 and June 2010 but made no further payments. On 31^st December 2010 Prato purported to exercise its rights to administrative self-redress by annulling the resolution to enter Swap 6 and applied (unsuccessfully) to the Regional Administrative Court for Tuscany to have Swap 6 declared invalid.
10. When it became clear that Prato would make no further payments, Dexia started proceedings in England. The terms of Swap 6, like the other swaps, incorporated the ISDA Master Agreement which contained an English law and jurisdiction clause.
11. On 25^th June 2015 Walker J handed down a judgment which established that, although Prato had the capacity in Italian law to enter into the swaps, it had a valid Italian law defence to Dexia's claim under Article 30 of a legislative decree (58 of 1998) called Testo Unico della Finanza ("TUF") which provided that "offsite" contracts with a financial service provider had to give the investor a right to withdraw within 7 days of execution. On 10^th November 2016 Walker J handed down a second judgment in which he dealt with other defences of Prato, as well as a claim and counterclaim in restitution and regulatory law counterclaims brought by Prato.
12. In the result, although the substantive claims and counterclaim failed, both parties had successful restitutionary claims against each other. Setting off those claims, Dexia has been ordered to pay €327,680.95 to Prato.

Structure of the claims and the responses to them

13. Dexia's primary claim is for money owing under Swap 6 on the basis that Prato has failed to meet its obligations since 31^st December 2010 in relation to that agreement.
14. In defence, Prato relies on provisions of Italian law, some of which only apply if Article 3(3) of the Rome Convention (relating to "mandatory rules" which apply notwithstanding the parties' choice of English law), is engaged and some of which are available independently of that finding. The capacity defences (or, as the judge called them, the local government law defences) are available to Prato regardless of the choice of English law, because it is agreed that the question whether Prato has capacity to enter into the swap contracts is governed by Italian law.
15. These capacity defences are based on:-

1) Article 119 of the Italian Constitution which contains a provision that local government bodies such as Prato may resort to "indebtedness only as a means of funding investments".

2) Article 41 of Law 448/2001: This provision turns on both the question whether it only applies to new debt and on an analysis of the concept of "convenienza economica". Local authorities can convert loans "under refinancing conditions that allow a reduction of the financial value of the total liabilities to be paid by the bodies themselves, net of fees …"

16. The other defences, which the judge called financial regulatory and civil law defences (which we will just call "financial defences"), only apply if Article 3(3) of the Rome Convention requires the application of mandatory rules of Italian law. The potential candidates are:-

1) Article 30 TUF which invalidates contracts resulting from "offsite offers" if the contract does not state that the investor (i.e. Prato) has a 7 day right of withdrawal from the commencement date of the agreement.

2) Article 32 TUF which deals with "distance marketing techniques", and applies the same right of withdrawal to contracts made by such distance marketing techniques.

3) Article 23.1 TUF and Article 30 CR (the Consob Regulations): these combined provisions lay down formal requirements relating to other contents of contracts made with financial service providers.

17. If the swaps are invalidated by any of the defences, the claims fail but there is a claim in restitution by both parties.
18. But in addition, Prato has counterclaims for breaches of the provisions of the TUF and Article 41 referred to above. Dexia concedes that claims for damages for these alleged breaches would be governed by Italian law because they are claims in tort for breach of statutory duty.

The First Judgment

19. In this judgment Walker J considered (among many other matters) Dexia's primary claim for sums due under Swap 6 and dealt with Prato's local government law defences and also the obligation under Article 30 TUF to provide for the seven day right of withdrawal in contracts executed offsite.
20. He concluded that none of the local government law defences succeeded. With regards to Article 119 of the Italian Constitution, he concluded that the word "indebtedness", as relevantly defined in paragraph 17 of Article 3 of Law 350/2003 did not apply to the swap agreements entered into between the parties in this case.
21. With regard to Article 41 of Law 448/2001, the judge said that the law only bore on transactions which are debt refinancing transactions involving new debt. He concluded that Swaps 1, 2, 3 and 6 fell outside the law for that reason. He also held obiter that the swaps met the doctrine of "convenienza economica" since they were to be regarded overall as being financially advantageous to Prato.
22. In relation to Article 30 TUF he decided first that all the elements relevant to the situation (other than the choice of English law and jurisdiction) were located in Italy and that, therefore, mandatory rules of Italian law were applicable to the facts of this case, pursuant to Article 3(3) of the Rome Convention. He went on to hold that Dexia had made an offsite offer which ought to have included the seven day withdrawal period in accordance with Article 30 TUF which was such a mandatory rule of Italian law. The consequence of failure to include this was that Prato had the right to nullify the agreements. Particularly important in this regard was his analysis of two Italian cases, Fideuram and Mediolanum.
23. He therefore held that Dexia's main claim failed because the application of Article 30 TUF nullified all the swaps.

The second judgment

24. In this judgment the judge upheld the parties' restitution claims against each other.
25. He also considered Prato's other defences to the main claim which relied on mandatory rules of Italian law. He concluded that the swaps were also in breach of Article 32 TUF because the contracts used distance marketing techniques and should have included the seven day withdrawal clause for that reason also.
26. The judge also considered that the swaps were in breach of the formal requirements of Article 23.1 TUF and Article 30 CR because they did not include information required by those Articles.
27. With regard to Prato's Italian regulatory counterclaims, the judge accepted that Dexia had tortious liability for breach of Article 30 TUF by failing to include the seven day withdrawal period in the swaps. However, Prato was unable to show that the breach caused any loss because it would not have refused to enter the swaps and would not have exercised the withdrawal option.

Scope of the appeals

28. Dexia's grounds of appeal are essentially that:

1) the judge was wrong to hold that Article 3(3) of the Rome Convention was engaged;

2) the judge ought to have found that Article 30 TUF did not apply where the initiative for the transaction came from the customer and the proposals of the financial institution were not unsolicited so that Prato could not have been taken by surprise by the terms of the swaps;

3) the judge ought to have found that the initiative came from Prato and there was no risk of Prato being taken by surprise by any offer;

4) Article 32 was inapplicable because Swap 6 was not made by distance marketing techniques; and

5) Article 30 of the Consob Regulations only required terms to be stated in the required form when there were relevant provisions in the swaps to which such terms could apply.

29. Prato has filed both its own appeal and a respondent's notice seeking to uphold the judge's decision on the grounds that:-

1) the judge should have found that the swaps contravened, and were void by reason of, Article 119 of the Italian Constitution;

2) the swaps were void under Article 41 of Law 448/2001;

3) in any event it had a defence that it would be illegal to pay any sums due by the law of the place of performance;

4) its counterclaim for breach of Article 30 should have succeeded because the damage flowing from Dexia's breach of statutory duty was the making of contracts which were void and that therefore all liability flowing from the contracts had to be negatived by declaring the swaps to be void and allowing Prato to recover all monies paid and an indemnity against its liability to make any further payments; and

5) its counterclaim in respect of Article 41 of Law 448/2001 should also have succeeded.

30. It is convenient to deal first with the local government defences since, if they succeed, all other arguments become irrelevant.

Did Prato have the capacity to enter into the swaps under Italian local government law?

31. Prato argued before Walker J that it had lacked capacity to enter into the swaps under Italian local government law on a number of grounds. Only two remain extant on these appeals. These are that:

1) all the swaps contravene Article 119 of the Italian Constitution read with the provisions of paragraph 17 of Article 3 of Law 250/2003; and

2) Swap 6 contravened Article 41.2 of Law 448/2001.

32. It was common ground before us that the question of whether there had been breaches of these legislative provisions was governed by Italian law. It was also common ground that breach of Article 119 of the Italian Constitution would have resulted in nullity of the swaps. No such agreement existed in the case of breach of Article 41 of Law 448/201. The judge did not find it necessary to resolve the question of whether, if there had been a breach of that provision, Prato would have lacked capacity to enter into the swap transactions. If it were to come to it, we might have to remit that issue for determination.
33. Before addressing the allegations of breach of Italian local government law, it is necessary to refer to the approach that this court adopts to findings of first instance judges on issues of foreign law, and to the agreed principles of Italian law relating to the interpretation of statutes.

Approach to issues of foreign law

34. English law treats foreign law as a question of fact proved by the evidence of suitably qualified experts in the relevant foreign law. In the case of disputed questions of foreign law, the task for the trial judge is to determine what the highest relevant court in the foreign legal system would decide if the point had come before it.
35. Except in the case which CPR 52.21 identifies, an appeal to this court is limited by that rule to a review of the decision of the trial judge. When this court is faced with a finding by a trial judge on a disputed issue of foreign law it is hearing an appeal against findings of fact. The proper approach to the review of findings of fact, and the reasons for that approach, were identified by Lewison LJ (with whom Longmore and Kitchin LJJ agreed) in FAGE UK Limited and another v Chobani UK Limited and another [2014] EWCA Civ 5 at paragraph 114:-

"Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also to the evaluation of those facts and to inferences to be drawn from them. The best known of these cases are: Biogen Inc v Medeva plc [1977] RPC1; Piglowska v Piglowski [1999] 1 WLR 1360; Datec Electronics Holdings Ltd v United Parcels Service Ltd [2007] UKHL 23 [2007] 1 WLR 1325; Re B (A Child) (Care Proceedings: Threshold Criteria) [2013] UKSC 33 [2013] 1 WLR 1911 and most recently and comprehensively McGraddie v McGraddie [2013] UKSC 58 [2013] 1 WLR 2477. These are all decisions either of the House of Lords or of the Supreme Court. The reasons for this approach are many. They include

i) The expertise of a trial judge is in determining what facts are relevant to the legal issues to be decided, and what those facts are if they are disputed.

ii) The trial is not a dress rehearsal. It is the first and last night of the show.

iii) Duplication of the trial judge's role on appeal is a disproportionate use of the limited resources of an appellate court, and will seldom lead to a different outcome in an individual case.

iv) In making his decisions the trial judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be island hopping.

v) The atmosphere of the courtroom cannot, in any event, be recreated by reference to documents (including transcripts of evidence).

vi) Thus even if it were possible to duplicate the role of the trial judge, it cannot in practice be done."

36. The FAGE approach is therefore the starting point. It has, however, been recognised that this approach does not always apply without qualification to factual findings of foreign law. In Parkasho v Singh [1968] P 233 at 250 Cairns J, giving the leading judgment of a Divisional Court with which Sir Jocelyn Simon P agreed, observed that:-

"… the question of foreign law, although a question of fact, is a question of fact of a peculiar kind …"

37. Cairns J went on to say that:-

"I think it is our duty in this case to examine the evidence of foreign law which was before the justices and decide for ourselves whether it justified the conclusion to which they came."

38. In MCC Proceeds Inc v Bishopsgate Investment Trust plc [1999] CLC 417, Evans LJ (giving the judgment of this court which included Morritt and Chadwick LJJ) addressed the question of what difference it made that the findings of foreign law were findings of fact "of a peculiar kind". At paragraph 13, he said:-

"In our judgment, the answer varies according to the nature of the issue which arises in the particular case and the kind of decision which the trial judge and now the Court of Appeal is called upon to make. Sometimes the foreign law, apart from being in a foreign language, may involve principles and concepts which are unfamiliar to an English lawyer. The English judge's training and experience in English law, therefore, can only make a limited contribution to his decision on the issue of foreign law. But the foreign law may be written in the English language; and its concepts may not be so different from English law. Then the English judge's knowledge of the common law and of the rules of statutory construction cannot be left out of account. He is entitled and indeed bound to bring that part of his qualifications to bear on the issue which he has to decide, notwithstanding that it is an issue of foreign law. There is a legal input from him, in addition to the judicial task of assessing the weight of the evidence given. The same applies in our judgment, in the Court of Appeal. When and to the extent that the issue calls for the exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the court is as well placed as the trial judge to form its independent view."

39. At paragraph 20 of MCC Proceeds, the court considered whether this court was entitled to substitute its own view for the view of the trial judge when there was acceptable evidence to support the judge's finding. The court's view was that its powers were so limited except:-

"… in a case where the English court interprets the statute in accordance with English rules of construction, there being no evidence that different rules would govern the foreign court's interpretation, and where there is no evidence that any of the words of the statute has a special meaning, different from its ordinary meaning, in the foreign context."

40. In Morgan Grenfell & Co Limited v SACE Istituto per I Servizi Assicurativi del Commercio [2001] EWCA Civ 1932, this court (Clarke, Mance and Dyson LJJ) was, as we are, concerned with issues of Italian law. Having referred to paragraph 13 of MCC Proceeds, Clarke LJ, giving the judgment of the court, said at paragraphs 50 to 51:-

"In that case the court was concerned with the construction of the Uniform Commercial Code which was part of the law of New York. It was therefore a question on which an English judge might be expected to make a valuable contribution. In this case, on the other hand, the judge was faced with differing views of Italian law, which is not based in any relevant respect upon the common law. … In these circumstances, there was less room for the judge to apply his own legal training and experience to help determine the relevant question, namely how … the Italian courts (and in particular the Corte de Cassazione) would have determined it.

It follows that, in our view, this is a case in which the correct approach was to consider the evidence of Italian law substantially in the same way as the other evidence of fact and opinion … However, in approaching the expert evidence of Italian law, it was in our view appropriate for the judge to have at least some regard to his own experience and training in so far as it was relevant to the particular issues which he was considering."

41. It follows that, subject to these exceptions, as the editors of Dicey, The Conflict of Laws (15^th Edition, 2012) state at paragraph 9-010:-

".. generally an appellate court, which will not have had the opportunity to put questions to the expert witness of foreign law, will be slow to substitute its opinion for that of the trial judge."

42. Mr Handyside QC for Dexia submitted that this proposition was not fully supported by the authority cited, Dallah Estate and Tourism Holding Co v Ministry of Religious Affairs, Government of Pakistan [2009] EWCA Civ 755. He suggested that the reasoning in that case turned on the extent to which the trial judge had in fact taken advantage of the opportunity to ask questions of the experts in foreign law. We do not so read the judgment. Moore-Bick LJ referred expressly at paragraphs 26 to 28 of his judgment to the advantage which the judge enjoyed in hearing the witnesses. In our view, subject to the exceptions recognised in the cases, this court's reluctance to intervene in cases involving findings of foreign law is more general. The trial judge not only has the advantage of asking questions of the experts, but also reads all the expert evidence and sees and hears the experts being cross-examined on it. He will see the extent to which the experts were able to justify their opinions and will be able to evaluate their reasoning. This is not solely, or even primarily, a question of assessing their "demeanour". This court is in no position to recreate the judge's experience from a reading of the transcript and by "island hopping" (to use Lewison LJ's vivid metaphor) in the sea of relevant evidence available to the judge.

Approach of Italian law to statutory construction

43. Article 12 of the Civil Code states:-

"In applying statutes no other meaning can be attributed to them than is made clear by the actual significance of the words, according to the connection between them, and by the legislative intent."

44. Italian courts must interpret each provision on the basis of its literal meaning, and in order to resolve any interpretation difficulties that may arise, they have to make reference to the "ratio legis", the purpose of the legislation.

Article 119 of the Italian Constitution

45. Article 119 of the Italian Constitution regulates the financial autonomy of regions and other local authorities. During the period 18th October 2001 to 20th April 2012, it stated so far as material, and with the addition of Roman numerals conventionally used to identify sub-clauses:-

"[I] Municipalities, provinces, metropolitan cities and regions shall have revenue and expenditure autonomy.

…

[VI] Municipalities, provinces, metropolitan cities and regions have their own property, which are allocated to them pursuant to general principles laid down in State legislation. They may resort to indebtedness only as a means of funding investments. State guarantees on loans contracted by such authorities are not admissible."

46. It is the penultimate sentence of Article 119(VI) which is of central relevance to this issue. Local authorities, such as Prato, can only "resort to indebtedness" to fund investments. The question which divides the parties is whether the swap contracts which Prato entered into with Dexia constitute a resort by Prato to indebtedness within the meaning of Article 119 of the Italian Constitution. Prato's case is that all the swaps did amount to a resort to indebtedness.
47. What is meant by indebtedness in Article 119 was addressed by the Italian Constitutional Court in decision 425/004. The court decided that what was meant by indebtedness was defined by Article 3 paragraph 17 of Law 350/2003 ("paragraph 17"). The relevant form of paragraph 17, from its enactment until 1st January 2009, was as follows:-

"For institutions … to the effects of Art. 119, sixth paragraph, of the Constitution, the following constitute borrowing: the taking of loans, the issuance of bonds, securitization of future flows of income not linked to a pre-existent financial activity, and securitizations with initial charge less than 85 percent of the market price of the object of the securitization rated by an independent and specialized body. The following also constitute borrowing: securitizations accompanied by guarantees provided by public administrations, and securitizations and the assignment of receivables due from other public administrations. Operations that do not involve additional resources, but permit to overcome, within the maximum limit established by current State legislation, a temporary shortage of liquidity and to incur expenses that already have a suitable budget cover, do not constitute borrowing, to the effect of said article 119."

48. From 1st January 2009 paragraph 17 was amended ("the 2009 amendment") so as to add premiums received upon entering into derivatives.
49. In decision 49/2011, the Court of Auditors, Joint Sections, held that it was not in accordance with the "ratio legis" of paragraph 17 to give it a purely literal interpretation. The court held that the reference to the "taking out of loans" extended as a matter of substance to a finance lease taken out by a public authority in respect of public infrastructure works.
50. The judge in our case had to resolve a dispute between experts on Italian local government law. Prof Dettori for Prato originally expressed the view that paragraph 17 merely set out examples of operations that have to be considered as "indebtedness" for the purposes of Article 119. He also considered that the 2009 amendment was no more than a clarification of what was already covered. Prof Dettori relied particularly on a decision of the Court of Appeal of Bologna number 734/2014 in Municipality of C.
51. The decision in Municipality of C features not only in this part of the appeal but also in the part relating to Article 30 TUF. The decision at first instance on the Article 119 issue had held that the relevant swaps were not debts. Exposure to debt was merely a possible effect of the contracts. They did not therefore fall foul of Article 119. The municipality appealed to the Court of Appeal of Bologna which held that all the swaps were a form of "current or potential debt". Some of the swaps at issue included an upfront payment to the client or "liquidity premium", but this feature was not essential to the court's reasoning. The reasoning as to the general invalidity of all the swaps was that they were a form of "current or potential debt" which was "aleatory" in nature. In consequence, as the swaps were not entered into in order to fund investment, there was a breach of Article 119(VI) and the swaps were a nullity.
52. Prof Napalitano for Dexia considered that, whilst a literal interpretation of paragraph 17 was not correct, the transaction in question nevertheless had, in substance, to be one of the listed types of transaction. Prof Napalitano considered that the decision of the Court of Appeal of Bologna in Municipality of C did not represent Italian law.
53. The judge preferred the evidence on these issues of Prof Napalitano. The swaps did not fall in substance within the categories of indebtedness within paragraph 17 of Law 350/2003.
54. On appeal Prato challenges the judge's conclusion, submitting that the swaps were by definition a form of indebtedness which was not used as a means of funding investment. Prato accepts that the judge correctly treated paragraph 17 as an exhaustive list of the types of transaction that constituted indebtedness for the purposes of Article 119(VI). Prato repeats its reliance on Municipality of C and submits that the judge gave inadequate reasons for rejecting its reasoning.
55. Mr Davies-Jones pointed to the fact that the decision of the Court of Appeal of Bologna in Municipality of C was heavily relied on by Dexia in the different context of its appeal on Article 30 of TUF. He submitted that we should adopt a consistent approach to the decision in Municipality of C, either giving weight to its findings on both Article 119 of the Italian Constitution and Art 30 TUF, or rejecting them both.
56. In its skeleton argument, but not in its oral submissions, Prato also said that the judge wrongly had regard to a Ministry of Economy and Finance ("MEF") memorandum of June 2007 ("the MEF June 2007 Memorandum") which was not a source of law, and that the judge had relied too heavily on his own impressions, contrary to the guidance in Morgan Grenfell & Co Ltd v SACE [2001] EWCA Civ 1932.
57. Mr Handyside supported the judge's reasoning. The task for the court was to determine whether, in substance, the transaction in question falls within the list in paragraph 17. The list did not include derivatives at the time when Prato entered into the swaps. It was amended prospectively by the 2009 amendment with effect from 1st January 2009 to refer to upfront premiums on derivatives entered into after that date, but not so as to make any wider reference to derivatives. This amendment would make no sense if paragraph 17 was intended to include derivatives generally. Prof Napalitano had been entitled to refer to the MEF June Memorandum in support of the proposition that derivatives are not a form of indebtedness but are instruments for debt management.

Discussion

58. The judge expressly recognised that the decision of the Court of Appeal of Bologna in Municipality of C was inconsistent with his analysis of the expert evidence on Italian law. He gave two specific reasons for not placing reliance on it: that its reasoning was vague and uncertain and that it contained no analysis of how the swaps fell within paragraph 17.
59. It is important to have in mind, however, that it was the judge's prior analysis of the expert evidence which formed the primary basis for rejecting reliance on Municipality of C. There were a number of elements to the judge's analysis. Firstly, the judge had the evidence of Prof Napalitano, contained in his first report, which explained how the provisions of paragraph 17 were, in his view, an exhaustive definition of the concept of indebtedness in Article 119. Prof Napalitano explained his view that paragraph 17 did not include swaps. He supported his view by reference to the MEF June 2007 Memorandum. He recognised expressly that this did not have the force of law. Nevertheless it was consistent with his view, when it stated that swaps were a form of debt management rather than indebtedness. Prof Napalitano further explained how the 2009 amendment to paragraph 17 was in his view "particularly significant". Accordingly, when the subsequently published decision of the Court of Appeal of Bologna in Municipality of C was raised, he stated that he did not agree that it represented Italian law for the reasons he had already given.
60. Secondly, as the judge explained, Prof Dettori retreated in cross-examination from his thesis that paragraph 17 was merely exemplary. His thesis would have left the door open for a conclusion that derivative contracts such as swaps were within the definition. However, leaving the door open in this way proved too much, because it would raise further questions as to what was within the definition. As the judge went on to explain, it was difficult to see how a local authority could enter into any form of future obligation, such as an obligation to pay its employees or pay insurance premiums, if the sort of potential debt involved in a swap was required to satisfy the investment criterion.
61. Thirdly, although Prof Dettori suggested in his second report that the concept of indebtedness had to be given a wide interpretation, he accepted that this was merely a possible interpretation. The judge had seen him being cross-examined on the question of why the legislature would have amended paragraph 17 to include premiums on derivatives if all derivative contracts were covered in any event. It was no doubt on the basis of this cross-examination that the judge rejected the professor's explanation that the amendment was purely clarificatory.
62. Fourthly, Prof Dettori was unable to support the essential reasoning in Municipality of C when he was faced with it in cross-examination. He accepted that the "aleatory" nature of a swap was not of itself sufficient to make a transaction a debt. In relation to the adequacy of its reasoning he defended the decision on the basis that it did not need to go further by way of explanation than it had.
63. The Court of Appeal of Bologna is, of course, not the highest Italian court with jurisdiction in administrative law matters. The task for the judge was to predict how the highest court would determine the matter if it came before it. In our judgment, the judge was plainly entitled to prefer the evidence of Prof Napalitano and conclude that the highest court would not follow the reasoning in Municipality of C. Neither expert supported its essential reasoning, which is indeed extremely vague, difficult to follow and devoid of any analysis of paragraph 17 or the 2009 amendment. Moreover the 2009 amendment, to include premiums on derivatives, is striking. If swap transactions were a form of indebtedness already covered by paragraph 17, it is impossible to see why the amendment was a rational one to make.
64. This appeal illustrates the dangers if this court allows itself to be drawn too readily into a re-assessment of a judge's findings on foreign law. On its face, the refusal by the judge to follow an appellate decision on the issue in question might suggest error. However, once that aspect of his decision is seen in its proper context, it is plainly a conclusion to which the judge was entitled to come.
65. As to the remaining points, it will be seen later in this judgment that we are also, with respect, not persuaded by the reasoning of the Court of Appeal of Bologna in Municipality of C in relation to Article 30 of TUF. Accordingly Mr Davies-Jones cannot complain of inconsistency in our approach. We would, however, reject the suggestion that the judge (or this court) was bound to accept the reasoning of a court on two distinct issues as a job lot. Although, of course, the judgment of the Court is entitled to the same measure of respect on both points, the reasoning must be considered separately. It does not follow from the fact that a court is right on one point that it is also right on the other, or from the fact that it is wrong on one point that it is also wrong on the other.
66. Whilst the MEF June 2007 Memorandum was not a source of law, Prof Napalitano was perfectly entitled to support his opinion by demonstrating consistency by reference to it. The judge does not expressly rely on the MEF memorandum in his reasoning, in any event. We are also unable to accept the criticism that the judge exceeded the extent to which he should be guided by his own training, particularly as the Italian statute is not in English, is not based on the common law and is not subject to English principles of statutory interpretation. Moreover, the respects in which the judge is supposed to have placed excessive reliance on his own training were not explained in oral argument.
67. We accordingly reject the allegation that the swaps contravened Article 119 of the Italian Constitution.

Article 41 of Law 448/2001

68. At all material times Article 41 of Law 448/2001 provided as follows:-

"1. In order to contain the costs of debt and to monitor the trends in public finance, the Ministry of Economy and Finance co-ordinates the access to capital markets of [certain public authorities including municipalities] To this end, these entities regularly send data on their financial situation to the Ministry. The content and the arrangements for co-ordination and data reporting are established by a decree of the Ministry of Economy and Finance to be issued…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 paragraph 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. Without prejudice to the provisions in the relevant contractual agreements, the entities may provide for the conversion of loans taken out after 31st December 1996, also through the placement of new bond issues or through the re-negotiation, also with other institutions, of loans, under refinancing conditions that allow a reduction of the financial value of the total liabilities to be paid by the bodies themselves, net of fees …

2-iii [or 2 ter] Transactions referred to in the preceding paragraph that are in violation of current regulations are communicated to the Court of Auditors for the adoption of measures within its competence."

69. The focus of the argument on this provision is on the words "under refinancing conditions that allow a reduction of the financial value of the total liabilities to be paid by the bodies themselves, net of fees ..." in Article 41.2. In Italian, this concept is referred to by the term "convenienza economica", which is, as the judge held, best translated as "financial advantage" rather than "economic convenience".
70. Prato's case is that Article 41.2 applies to swaps, and Swap 6 contravened Article 41.2 because it failed the financial advantage test. Dexia's ultimate position at the trial was that the financial advantage requirement did apply to derivatives such as swaps, but subject to a number of qualifications. Two of these were:

1) The financial advantage requirement only applies where there is (a) a debt refinancing transaction which (b) involves a "new debt".

2) Even where the financial advantage requirement applies, it does not involve taking account of the initial MTM (as to which see below) or so-called implicit costs of the derivative, which are irrelevant as they are not actual costs.

71. Swap 6 was entered into as part of a debt restructuring transaction which took place in 2006 relating to bonds issued in 2004 ("the 2004 bonds") which renegotiated the terms of Prato's debt. This involved (a) an extension to the maturity date of the 2004 bonds; (b) a change to the amortisation profile of the 2004 bonds; and (c) changes to various fixing and payment dates. Swap 6 was an integral part of this 2006 debt restructuring.
72. These issues require consideration, amongst other things, of what has been said in three judgments:-

1) Council of State decision 5628/2011 "Pisa I".

2) Council of State decision 5962/2012 "Pisa II".

3) Decision of the Criminal Division of the Court of Appeal of Milan 1937/2014 "Arosio".

73. In Pisa I the Council of State decided that certain derivatives could be encompassed within Article 41 because they were instruments by which an overall restructuring was realised. The Council of State did not decide whether there had on the facts been a breach of Article 41 by the instruments in question, however. It appointed an expert, Dr Angeletti, who was an Inspector of the Bank of Italy, to determine questions related to whether this had been the case.
74. In Pisa II the Council of State considered the report of Dr Angeletti. The Council of State decided that the derivatives and new debt were connected and interlinked and that they were structurally geared towards the attainment of the objectives of Article 41. There was no breach of the financial advantage requirement.
75. In the criminal case, Arosio, the court appeared to approve a passage in an MEF circular of October 2011 ("the MEF October 2011 Circular") as to which see further below. It also made some observations on whether "implicit costs" were relevant to the financial advantage test.
76. Prof Napalitano for Dexia advanced the view that Article 41.2 only applied where the refinancing involved new debt. His evidence was that Article 119 envisages, as we have seen, that indebtedness within that article will have come about as a result of financing investment. Article 119 would not, however, permit refinancing involving new indebtedness in the absence of new investment. The purpose of Article 41.2 was to permit new indebtedness when part of a refinancing, which would otherwise fall foul of Article 119. Thus the requirements of refinancing and new debt were the logical consequence of the legislative purpose: to permit refinancing where legislative permission is needed because the refinancing involves new debt.
77. Professor Dettori's analysis for Prato was that Article 41.2 was broader. He argued that it made no sense to insist on the financial advantage requirement only for new loans, and to free local authorities from the requirements in relation to renegotiation of existing loans.
78. The judge preferred Prof Napalitano's analysis. As Swap 6 did not involve new debt, it did not have to satisfy the financial advantage requirement.
79. It was not therefore necessary for the judge to consider whether the second of the two qualifications which we have set out in para 70 above was applicable. The judge considered, however, that initial MTM was not relevant, relying on the reasoning in Pisa II.

The "new debt requirement"

80. Prato take two points in relation to the judge's conclusion that Article 41.2 only applied to refinancing involving new debt. These were (a) that it gives undue weight to a formalistic distinction which runs counter to the legislative purpose, and (b) that it was not in any event supported by the weight of the evidence before the judge.
81. Mr Davies-Jones drew attention to the way in which the expert evidence emerged prior to and at the trial. Neither expert stated in their first reports that the purpose of Article 41.2 was to permit indebtedness which would otherwise fall foul of Article 119. In fact Prof Napalitano said in his first report that the purpose of Article 41 was to contain the costs of local authority debt and to ensure the monitoring of public finances. Article 41 was not a law implementing Article 119(VI). The professor went on to stress that "it is not a coincidence that the constitutional provision [i.e. Article 119 (VI)] is not even mentioned in the text of Article 41". Far from indicating a connection, this evidence had pointed to the absence of connection between the two articles. This legislative purpose had not appeared in the Joint Memorandum prepared by the experts either. The point that the legislative purpose of Article 41.2 was to permit indebtedness which would otherwise fall foul of Article 119 was made for the first time in Prof Napalitano's supplemental report. When challenged on this point, the professor had accepted that it was simply his opinion, and was not supported by any decisions of Italian courts or legislative materials.
82. Professor Napalitano had also accepted in cross-examination that the opening words of Article 41.1 (which referred to the containment of debt) also represented the legislative purpose of Article 41.2. He had also accepted that there were two possible interpretations of Article 41.2, one wide and one narrow, and it was the narrow interpretation which he preferred.
83. Mr Davies-Jones accepted for the first part of his argument that a legislative purpose of Article 41.2 was that identified by Professor Napalitano, namely to permit indebtedness which would otherwise fall foul of Article 119. The core of Prato's case on appeal was that, given that there are two possible interpretations of Article 41.2, the judge should have given effect to the over-arching legislative purpose, namely the containment of debt. If the purpose is to contain the cost of debt, it made no sense to limit the application of Article 41.2 to the case where the borrower pays off an old loan and enters into a new one, and to exclude its application to cases where the terms of the old loan are simply renegotiated to the new terms without repayment. This was a formalistic distinction which ran contrary to the overall legislative purpose, because it treated economically identical transactions differently.
84. Turning to the language of Article 41.2 Mr Davies-Jones submitted that the words "conversion of loans" and "the re-negotiation, also with other institutions, of loans" were broad. Professor Napalitano had accepted that "re-negotiation" was capable of including changes in the duration of the debt and variation in interest provisions. His evidence had been that these wide words were cut down by the words "under refinancing conditions". Accordingly the new debt requirement depended entirely on giving refinancing a meaning which excluded the renegotiation of existing loans.
85. Prof Dettori's evidence was that the words "under refinancing conditions" had to be interpreted "in the widest sense possible". The words included any transaction in which the terms of an existing debt are modified.
86. Turning to the second part of his argument, that the new debt requirement was not supported by the weight of the evidence, Mr Davies-Jones submitted that there was no support for the new debt requirement in Pisa I or Pisa II. Neither judgment dealt with the new debt requirement. On the facts of those cases, there was new debt in the form of a bond issue, so the issue could not have arisen. Dexia had not contended otherwise and Professor Napalitano had not sought to draw support from either case on this specific point. When Professor Napalitano had raised the new debt point in his first report he had referred only to a circular from the Cassa Depositi e Prestiti, a state-owned financial institution, of 29th April 2005 ("the CDP Circular"). He had accepted that this was not a source of law.
87. Apart from this the judge had relied on a passage in Arosio which had in turn relied on the MEF October 2011 Circular. That circular responded to an enquiry from a local authority concerning the renegotiation of various bond issues. The response indicated that Article 41.2 "… concerns the renegotiation of pre-existing loans, which may be performed either through the opening of new loans to replace the old or through the placing of new bond issues …". It explained that Article 41.2 was not applicable to swaps, which were not in any event a form of indebtedness, but continued that the provisions applied "exclusively to the renegotiation of old debt through new debts".
88. Mr Davies-Jones submitted that it was not clear what the MEF October 2011 Circular meant by "new debt", and that it was therefore an unreliable foundation for a view as to what situations Article 41.2 was intended to cover.
89. Although the decision in the criminal case of Arosio was known earlier in 2014, the reasons were not published until the eve of the trial. The decision is very long, extending to nearly 500 pages in translation. Both experts were permitted to prepare and file further supplemental reports to deal with the effect of the decision.
90. Mr Davies-Jones submitted that Arosio was not a case where it was necessary to decide whether the new debt requirement existed as it involved bond issues. Thus, although the judgment quotes the MEF October 2011 Circular, it did so for other purposes.
91. Mr Handyside submitted that the judge had been right to say that "under refinancing conditions" limited the application of Article 41.2 to cases of new debt. The new debt requirement had been a feature of Prof Napalitano's evidence from the start, although he had only rationalised it by reference to the narrower legislative purpose of permitting indebtedness which would otherwise fall foul of Article 119 in his second report. His view was later supported by the decision in Arosio which in turn gave judicial support to the MEF October 2011 Circular. In those circumstances the judge was entitled to adopt Prof Napalitano's reasoning.

Discussion

92. The judge had to decide between two possible interpretations of the original Italian phrase which is translated as "under refinancing conditions" in Article 41.2. The expert evidence before him indicated that there were two possible interpretations. Italian law uses the legislative purpose of a provision to resolve such disputes as to interpretation.
93. Mr Handyside attempted to persuade us that it was wrong to suppose that the purpose of Article 41.2 was the same as Article 41.1 because the words "to contain the cost of debt" only appeared expressly in Article 41.1. We do not think we would be justified in following that approach. From the passages of the evidence we were shown, it is clear that Prof Napalitano did accept that Article 41 had an overall legislative purpose of containing debt. However, that conclusion does not, as it seems to us, take Prato very far. On any view, the various clauses of Article 41 are directed to measures for the containment of debt in specific situations. Article 41.2 plainly furthers that aim by imposing the financial advantage requirement in the case of particular transactions. The dispute in the present appeal is not about whether Article 41.2 ultimately operates to contain debt, but about the particular situations to which its test of financial advantage is to apply.
94. The phrase "under refinancing conditions" is part of the definition of the circumstances to which Article 41.2 and its financial advantage test is intended to apply. The dispute about the scope of that term raises the question of the choice of that specific phrase. In the absence of any other legislative rationale for the use of that phrase, we would be inclined to agree that there would be no obvious reason to accord it a narrow construction, so as to exclude debt restructuring which did not involve new debt.
95. Once, however, it is accepted that there is another and more specific legislative purpose behind Article 41.2, the position is no longer at all clear cut. Prof Napalitano starts from the proposition that, although imposing the financial advantage condition, Article 41.2 is essentially permissive, in the sense that it allows new indebtedness which would otherwise fall foul of Article 119 (in the absence of new investment). Its purpose is not the imposition of a general financial advantage requirement, but as the counterbalance for a relaxation of the investment requirement of Article 119. Viewed in that light, the scope of Article 41.2 is brought into line with its legislative purpose only if "under refinancing conditions" is limited to the cases where there is a "resort to indebtedness" within Article 119.
96. Mr Davies-Jones makes a formidable forensic point concerning Prof Napalitano's original evidence in which the Professor suggested the absence of a reference to Article 119 in Article 41 was "not a coincidence". It is also correct to point out that there is no judicial decision or indeed other material which makes a connection between the two provisions. The first of these points is no doubt one which would have had to be put to Prof Napalitano, and his response considered by the judge. We were not told whether this was done or, if it was, what his response was. As to the second point, there was equally no direct support for Prof Dettori's interpretation. The judge accordingly had to decide how the highest Italian court would ultimately resolve the rival arguments. Moreover, now that it is accepted by Prato that Prof Napalitano's legislative purpose derived from Article 119 was one of the purposes behind Article 41.2, these criticisms lose most if not all of their force.
97. In the end we have come to the conclusion that the judge was entitled to accept Prof Napalitano's analysis and reject that of Prof Dettori. In paragraph 172 of the first judgment the judge said:

"Professor Dettori's broader approach, in effect, suggested that article 41 was concerned to ensure that every financial transaction of a relevant local authority was subject to the financial advantage requirement. This, however, does not acknowledge that article 41.2 is concerned with permitting local authorities to do specific things, nor does it acknowledge or explain the express reference in the second sentence to the things in question taking place "under refinancing conditions". The cases he cited similarly offer no such explanation."

98. The judge was conscious of the argument that containment of debt was an overall purpose of Article 41, and that the narrower interpretation treated similar transactions differently (as can be seen for example from paragraph 173 of the judgment). He was, nevertheless, not compelled to hold that these arguments required him to disregard the additional purpose of Article 41.2. Prof Napalitano's interpretation allowed him to give effect to them both.
99. We also reject, as a means of attacking the judge's conclusions, the argument advanced by Prato that the evidential support for the new debt requirement was so weak that it could not support the judge's reliance on it. Prato accept that an expert on Italian law is entitled to express an opinion as to how the highest court would decide a matter if it came before it even in the absence of support from decided cases or other sources. The judge was able to rely on Prof Napalitano's evidence, which he had advanced in his first report, that the new debt requirement existed, even though he did not at that stage assert the connection with Article 119. In due course there was further support for his opinion in the shape of the decision of the Court of Appeal of Milan in Arosio which approved without criticism the view expressed in the MEF October 2011 Circular. In those circumstances there was ample evidence to justify the conclusion which the judge arrived at. It would be wrong for this court to substitute its own view of the evidence for that of the judge.
100. Prato do not assert that Swap 6 involved new debt. It follows that we conclude that Article 41.2 of Law 448/2001 did not apply to Swap 6.

Did Swap 6 fail the financial advantage test?

101. As we have concluded that Article 41.2 did not apply to Swap 6, this question is not material to the outcome of the appeal. It did not strictly arise before the judge either, although he expressed his obiter views on it. As we have heard argument on it, we will nevertheless express our conclusion.
102. Before addressing the arguments it is necessary to say something about the concept of the MTM or mark-to-market of a swap. Swaps involve two-way cash-flows with a fixed rate of interest on one leg and a variable rate on the other. The judge summarised the concept of MTM in its simplest form as "the present value of the expected cash-flows, calculated according to a series of generally accepted conventions". If, on inception, the present value of what has to be paid on the fixed leg is the same as what will have to be paid on the floating leg, the MTM will be zero for both sides. However if the annual discount rate in the market differs from the fixed rate, then the value will no longer be zero. The MTM therefore has an initial value and a value which can vary for each party through the life of a swap, depending on current discount rates.
103. Prato's allegation that Dexia had a duty to disclose initial MTM to Prato formed an important part of the issues which the judge had to decide, but with which we are not directly concerned on this appeal. At paragraphs 186 to 239 of the second judgment the judge analysed the economic evidence and concluded that initial MTM did not represent an actual cost to Prato. In particular:-

1) initial MTM does not indicate an outcome: it is the present value of the expected cash flows discounted at present market rates. The outcome depends on what happens to market rates;

2) far from being a predictor of cash flows, MTM represented an adjustment to a notional benchmark representing the provision that the bank has made for costs, risks and return;

3) the MTM was no more than the present value of the spread between the fixed rate and the notional mid-market interbank rate, at which no bank could be expected to transact with a counterparty such as Prato; and

4) MTM, therefore, did not represent a cost, or an expected cost to Prato.

104. Prato's case, in essence, was that the Council of State in Pisa II had made it clear that in calculating financial advantage of a restructuring of which a swap formed part it was necessary to take into account the MTM as a cost. Dexia's case, in essence, was that the Council of State had decided the opposite.
105. The judge's obiter reasoning was as follows:-

1) He noted that Dexia's case was supported by Prof Napalitano, whereas Prof Dettori considered that the issues were outside his expertise.

2) He considered that Dexia's reasoning was "strongly supported" by Pisa II, in particular passages to the effect that the so-called "implicit costs" of a derivative "do not by any means constitute an effective cost … but merely stand for the value that the swap could have had in an abstract and hypothetical (but utterly unrealistic and untrue) negotiation".

3) He summarised six points made by Prato, none of which he considered gave a satisfactory answer to Dexia's case based on Pisa II. Some of these are raised again on this appeal. They include reliance on some passages from Pisa I, criticism of Dexia's reliance on Pisa II and criticism of the Council of State's reliance on a criminal decision of the Court of Cassation in Messina.

4) He also thought that Dexia's reasoning was supported by a passage in Arosio (cited above) when discussing the Pisa II judgment:-

" … in regard to the implicit costs of the swap contracts, the [Council of State] felt that on no account did the latter represent an actual cost, that is to say an amount actually sustained by the investor (in the present case the provincial administration of Pisa), but rather the theoretical value of the swap in an abstract and hypothetical (albeit unrealistic and untrue) negotiation …"

5) Prato's answer to Arosio was that the context was one where the court was saying that non-disclosure by the banks was legal and the Court of Appeal had in any case stressed repeatedly that local authorities should take account of implicit costs.

106. Mr Davies-Jones submitted that on all the economic evidence before the court Swap 6 failed the financial advantage test. The judge had not accorded adequate weight to the clear statements in Pisa I which recognised that the implicit costs "must fall under and be evaluated for the purposes of the economic convenience of the operation". The judge's reliance on Pisa II was misplaced. The Council of State applied Dr Angeletti's approach which did take account of MTM. The judge's reliance on Arosio was also incorrect as different considerations applied in the criminal context, where the relevant criminal charge involved an ex post assessment of actual damage. Further there were the other passages in Arosio which supported Prato's analysis.
107. If Prato is right that Italian administrative law requires the initial MTM to be taken into account by applying the Angeletti method, then the figures were not in dispute. The economic advantage of the debt renegotiation applying this method was 177,827 Euros, whereas the disadvantage of Swap 6 was 188,708 Euros. There was accordingly a net financial disadvantage of some 11,000 Euros, in the context of a swap based on a notional sum of some 67 million Euros.
108. Mr Handyside relied on the unchallenged findings in the second judgment that, as a matter of economics, MTM was not an actual cost and provided no prediction of the expected outcome of the swap. In those circumstances it was most unlikely that any system of law would provide that MTM should be used in the calculation of financial advantage.
109. Mr Handyside submitted that the Council of State in Pisa I had not decided that initial mark to market was relevant. The passage relied on by Prato, submitted Mr Handyside, was in the context of the bank's unsuccessful argument that swaps did not fall within Article 41.2 at all. The Council of State had rejected that argument. Where the swaps formed part of a debt restructuring it was necessary to consider debt and swap together. The Council of State was not deciding in that passage how one approached the calculation of economic advantage, or whether initial MTM was relevant. That was, the Council of State had held, a technical issue on which they were entitled to seek the assistance of the expert.
110. Turning to Pisa II Mr Handyside drew attention to the fact that the Council of State repeatedly referred to Pisa I as its "provisional judgment". The court ultimately decided the case on the basis of Dr Angeletti's calculations but disagreed with the use of initial MTM in the calculation. Even taking it into account as a cost, however, financial advantage of the transactions under scrutiny had been made out.

Discussion

111. The key to this aspect of the appeal is the correct understanding of the sequence of decisions in Pisa I and Pisa II. On this, we agree with the judge's analysis that Pisa I did not decide that initial MTM was to be taken into account when calculating financial advantage. The passage relied upon by Prato is the conclusion of the court's consideration of the issue of whether the swap (with such costs and advantages as it entails) falls to be considered in combination with the costs and advantages of the debt transaction. We do not read the paragraph on page 59 of the judgment in Pisa I and on which Prato relies as deciding in terms that the initial MTM represented a cost to Pisa. Rather it is explaining that the swap must be included in the overall evaluation of the financial advantage of the transaction.
112. That view of Pisa I is confirmed when one comes to Pisa II. In the course of that judgment the Council of State records observations made by Dr Angeletti about the nature of the initial MTM which chime closely with the findings of Walker J in the present case. Thus, at page 70 of the translation, the consultant had referred to the decision no 47421 of the Court of Cassation, Criminal Section entitled Messina according to which he said:-

"MTM does not express a concrete and real value, but rather, is a financial projection based on a theoretical market value in the event of early termination … and is influenced by a series of factors and therefore adjusted in accordance with the trend in financial markets, as the parameters used for its determination also have to include upfront paid out and the profit for the bank. It is therefore only in hindsight that it is possible to establish whether the transactions represent an advantage or disadvantage for the bank."

113. Then, in its concluding paragraphs at pages 83-84 of the translation, the Council of State says this:-

"In this sense, and on the basis of the lucid, detailed and consistent clarifications provided by [Dr Angeletti], it has to be noted that the so-called "implicit costs" of the swap, which were reasonably corrected to around €320,000 … do not by any means constitute an effective cost, that is, a sum effectively paid out by the Province, but merely stand for the value that the swap could have had in an abstract and hypothetical way (but utterly unrealistic and untrue) negotiation … In any case, these implicit costs (whose limits we have already had occasion to emphasise previously), given that they are well within the threshold of €402,000 (the profit from the renegotiation of the loan contracted prior to 31 December 2016), would not in themselves have been sufficient to lead to a negative evaluation of the economic convenience of the overall debt restructuring transaction …"

114. Finally, at page 85 of the translation the Council of State refers to the fact that "it is not possible to speak of "implicit costs" … which were correctly and reasonably estimated by the consultant at €320,000, which represent the value of the swap, not a cost effectively sustained by the authority" as "the decisive consideration".
115. Against that reading of the decisions, which was supported by Professor Napalitano, we do not take the decision of the Council of State as laying down that the Angeletti method is the correct method to follow in calculating the financial advantage of a debt restructuring involving a swap. On the contrary, it seems to us that it rejects the use of the initial MTM as an effective cost, for the reasons it gives.
116. The judge recognised that the Messina and Arosio decisions needed to be viewed with caution given their different, criminal law context. Nevertheless they were entirely consistent with the view that initial MTM was not a real or effective cost and not one which was relevant to the calculation of financial advantage.
117. In summary, on this ground of appeal Prato needed to establish that initial MTM was relevant to the calculation of financial advantage. On that issue we consider Dexia and the judge are correct, and that initial MTM is not a relevant cost. We therefore conclude that Prato have not established that Swap 6 failed the financial advantage requirement.
118. Accordingly we reject the grounds of appeal based on Article 41 of Law 448/2001. It follows that all the local government, or lack of capacity defences, fail.

Financial Defences and the Rome Convention
 


119. These defences (as outlined in paragraph 15 above) are not available as a matter of domestic English Law. Prato, however, rely on them because, when the swaps were concluded, the Contracts (Applicable Law) Act 1990 ("the 1990 Act") incorporated the EEC Convention on the Law Applicable to Contractual Obligations ("the Rome Convention") into the law of the United Kingdom. (The Convention has now been superseded by Regulation 593/2008, known as Rome I but this later convention only applies to contracts made after 17^th December 2009). Article 3 of the Rome Convention gives primacy to the law chosen by the parties but provides that the choice of a foreign law is not in some circumstances to prejudice the application of mandatory rules of another country. It is accepted that the provisions of Italian law relied on as financial defences are mandatory rules of Italian law and it is therefore necessary to determine whether the circumstances of the case are such as to require the application of those Italian provisions.
120. Article 3 of the Rome Convention provides:-

"Freedom of choice

1. A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

2. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice under this Article or of other provisions of this Convention. Any variation by the parties of the law to be applied made after the conclusion of the contract shall not prejudice its formal validity under Article 9 or adversely affect the rights of third parties.

3. The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law of that country which cannot be derogated from the contract, hereinafter called "mandatory rules".

4. The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Article 8, 9 and 11."

121. The critical question, therefore, is whether, apart from the ISDA law and jurisdiction clause "all the other elements relevant to the situation are connected with one country only".
122. In this case Walker J decided that all the other elements relevant to the situation at the time of the choice were connected with one country only i.e. Italy. In so doing he relied on Prato's observations that i) Italy was where both parties were incorporated; ii) Italy was where both parties communicated with each other; iii) Italy was where the swaps were entered into; and iv) Italy was the place of performance of the obligations.
123. By contrast it was argued for Dexia (i) that the swap contracts had deliberately incorporated the standard form of ISDA Master Agreement which was an international form designed for routine use in derivative transactions in the international capital markets and (ii) that in the case of each of the swaps Dexia had entered into back-to-back hedging swaps with banks outside Italy using the same international standard documentation. Dexia contended that these were elements relevant to the situation, which were not connected with one country only.
124. The judge said (para 211):-

"To my mind, Prato is right to say that both these points are misconceived. As to the master agreement, it is true that it is an international standard form, but it does not follow from this that it is an "element in the situation" which is connected to a country other than Italy. It is of course designed to promote certainty, but that does not give it a connection to a country other than Italy. Nor does the significance and global nature of ISDA. Even if the standard form itself were shown to have a connection with another country, that would not in the present case be an "element relevant to the situation" as it existed at material times. Throughout the relevant period everything relevant to the use of the form happened in Italy. As to Dexia's decision in each case to choose a non-Italian counterparty for its back to back hedging swap, that does not appear to me to be an element relevant to the situation as between Prato and Dexia. Whether or not Dexia entered into a hedging swap is a matter for Dexia alone; to Prato it is immaterial. There was no contemplation that a non-Italian entity would take over obligations of either party. Dexia's choice to use a non-Italian counterparty is something which is completely external to "the situation" at the time that choice of law was agreed."

125. This shows that the judge thought that the phrase "elements in the situation" had to be elements connected to a country other than Italy. In Banco Santander Totta S.A. v Compania Carris [2016] 4 WLR 49 a case, subsequently determined in the Financial List on 4^th March 2016, Blair J disagreed with this approach, relying on dicta of Cooke J in Caterpillar Financial Services Corporation v SNC Passion [2004] EWHC 569 (Comm) to the effect that "elements relevant to the situation" was a wider concept than "elements relevant to the contract" and paragraph 32-087 of Dicey, Morris and Collins, Conflict of Laws 15^th ed. (2012) para 32-087. He said (para 404):-

"For the purposes of article 3.3 of the Rome Convention, in determining whether, choice of law aside, all the other elements relevant to the situation are connected with one country only, the inquiry is not limited to elements that are local to another country, but includes elements that point directly from a purely domestic to an international situation. In financial transactions, the use of ISDA or other standard documentation used internationally may be relevant, and the fact that the transactions are part of a back-to-back chain involving other countries may also be relevant. Respectfully disagreeing with the conclusion in Dexia in these regards, the court considers that this approach in consistent with the authorities set out above, and specifically that the latter point is supported by the Caterpillar case and the commentary in Dicey, Morris & Collins."

126. The Banco Santander case went to the Court of Appeal [2017] 1 WLR 1323 in which Mr Ali Malek QC (for the investors in that case) submitted that Blair J was wrong to hold that elements relevant to the situation could include factors of an international kind which did not point to another country. That argument was rejected. The Master of the Rolls (with whom Sir Martin Moore-Bick and Longmore LJ agreed) said:-

"46. I accept the judge's analysis, and Santander's case, that article 3(3) is properly to be approached as a limited exception to the policy or principle or starting point of party autonomy and, as such, it is to be construed narrowly.

…

53. If it had been intended that "elements relevant to the situation" in article 3(3) should be confined to factors of a kind which connect the contract to a particular country for the purpose of identifying the proper law in the absence of an express choice, the drafter could have used the familiar and simple conflict of laws language of "close connection", which one finds in article 4. The marked difference between the language of article 3(3) and of article 4(I) is striking and supports an interpretation of article 3(3) in accordance with the natural and ordinary meaning of its words. That striking difference is also apparent from other language versions of the Convention, such as the French, Italian and Spanish versions.

54. In so far as Paul Walker J in the Dexia case [2015] EWHC 1746 (Comm) reached a different conclusion on the proper interpretation of article 3(3), that is to say by confining "elements of the situation" to those with a connection to a particular country in a conflict of laws sense, I respectfully disagree with him. …."

127. Mr Davies-Jones for Prato asked us to note the cautious way in which the Master of the Rolls expressed his disagreement with Walker J in this case ("In so far as …") and submitted that the judge had not in fact confined the elements of the situation to those with a connection to a particular country in a conflict of laws sense. But paragraph 211 of the judgment twice uses the phrase "connected/connection to a country other than Italy" and also the phrase "connection with another country" and it is impossible to escape the conclusion that the judge did think that "elements relevant to the situation" did have to be connected with another specific country if the court was to relegate the law chosen by the parties in favour of the mandatory rules of another country.
128. We are bound by the decision of this court in Santander and must therefore decide that the judge proceeded on a wrong basis when he concluded that the matters relied on by Dexia were not elements relevant to the situation.
129. That is by no means the end of the matter since it still remains a question whether all other elements relevant to the situation of the parties at the time of the contract were located in a country other than England. That calls for an evaluative judgment but, since the judge proceeded on a wrong basis, this court must now conduct that evaluation itself.

Relevant elements

130. In the Banco Santander case Blair J considered eight possibly relevant factors in great detail (para 409) and set out his conclusions in para 411:-

"411. Summarising the main points made above, because of the right to assign to a bank outside Portugal, the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market in which the contracts were concluded, and the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements are routine, the court's conclusion is that article 3.3 of the Rome Convention is not engaged because all the elements relevant to the situation at the time of the choice were not connected with Portugal only. In short, these were not purely domestic contracts. Any other conclusion, the court believes, would undermine legal certainty."

This court declined to interfere with what it called the judge's "evaluative exercise" (para 67).

131. The present case, is, of course, distinguishable in as much as the swap contracts with which this court is concerned did not contain any specific right to assign the contract to a bank outside Italy and there was no "practical necessity" for a relationship between the investor and a bank outside Italy but two of the other three elements, considered by Blair J to be important, are present namely the use of standard international documentation, in the form of the ISDA Master Agreement and the routine back-to-back contracts concluded with banks outside Italy. The third element, the international nature of the swaps market in which contracts were concluded, is perhaps somewhat less obvious in this case than in Banco Santander.
132. In relation to the ISDA Master Agreement, signed by the parties in 2002 and expressly incorporated by the penultimate paragraph of Dexia's acceptance of Prato's proposal, the following factors are important:-

1) it is the standard form of master agreement of the International Swap Dealers Association Inc. There is thus at once an international element rather than a domestic element associated with any particular country;

2) the form is the Multi-currency – Cross Border form; there is a "Local Currency – single Jurisdiction form" albeit, as we were told, a form used almost entirely in the United States rather than elsewhere. The form thus contemplates more than one currency and the involvement of more than one country; and

3) the form signed by the parties was in the English language, despite that not being the first language of either party.

133. In relation to the back-to-back contracts, Prato submitted that, unlike the investors in Santander, who accepted that it was foreseeable that the bank would enter back-to-back contracts, there was no finding that Prato foresaw any back-to-back hedging arrangements whether with other Italian banks or (as in this case) with banks outside Italy. For Blair J in Banco Santander it was the fact that the back-to-back contracts were "routine" that was important (para 411). It is true that the Master of the Rolls in paragraph 65 of his judgment called them "routine and foreseeable". No doubt they were (objectively) foreseeable because they were routine. The back-to-back arrangements in the present case were equally routine and the fact that they were made with banks outside Italy shows just how international the swaps market actually is.
134. It seems to us that each of these two factors is enough on its own to demonstrate an international and relevant element in the situation such that it is impossible to say that "all elements (other than the choice of law) relevant to the situation" are located in a country other than England such as (in this case) Italy. The international dimension precludes any such assertion. The use of the ISDA Master Agreement is self-evidently not connected with any particular country and is used precisely because it is not intended to be associated exclusively with any such country.
135. We also consider that the presence of back-to-back contracts is highly significant. If the mandatory local laws of a party are to be applied to any individual swap contract, there is a real risk that the back-to-back security will quickly become illusory. If for example the law of one country requires (as does Italian law) a right of withdrawal to be accorded to the investor for 7 days after execution but the law of another country governing a back-to-back contract has no such requirement or, say, a 28 day right of withdrawal, the back-to-back contracts will cease to be useful. It is this sort of consideration that led Blair J to emphasise the need for certainty in paragraph 411 of Banco Santander and we agree with him.
136. We add that the fact that non-Italian banks tendered for the original advisory contract ultimately made with Dexia is, in our view, also a relevant element in the situation because it also shows the international nature of the market in which the swaps contracts were in due course concluded. But in the light of what we have just said that is no more than icing on the cake.
137. Mr Davies-Jones made a sustained submission in relation to the lengthy paragraph 409 of the judgment of Blair J with its detailed consideration of eight possibly relevant factors in that case and then compared them in equal detail to the facts of this case. In our judgment this approach was misplaced. It should be possible for parties to swap contracts to know where they are in relation to Article 3(3) of the Rome Convention without the detailed comparison of the facts of one case with the facts of another case. Once an international element comes into the picture, Article 3(3) with its reference to mandatory rules should have no application. It is true that Banco Santander had at least two additional elements pointing away from Portugal (the right to assign and the necessity for a relationship with a non Portuguese bank) and that, in this sense, the present case is not as obvious as Banco Santander; but it is, in our view, obvious enough.

Italian Law

138. Once it is clear that mandatory rules of Italian law have no application to the swaps it is not strictly necessary to consider the applicability of the rules of Italian law said to constitute Prato's financial defences, but we heard full argument and should express our views, in case we are wrong about Article 3(3).

(1) Article 30 of TUF

139. This article, of which sub-paragraphs 6 and 7 are the most important, provides:-

"Art. 30

(Offsite offer)

1. By offsite offer is meant the promotion and placement with the public.

i) of financial instruments in a place other than the registered office or the branch offices of the issuer, the promoter of the investment or the person in charge of the promotion or the placement;

ii) of investment services in a place other than the registered office or the branch offices of the person providing, promoting or placing the service.

2. An offer shall not be deemed offsite if made to professional investors, as defined by Consob regulation upon the advice of Banca d'Italia.

3. The offsite offer of financial instruments may be made:

i) by persons authorised to perform the service provided by Article 1, paragraph 5, letter c);

ii) by Investment Management Companies, by harmonized management companies and by Investment Companies with Variable Capital, but only of quotas and shares of Institutions for Collective Savings Investment.

4. Investment firms, banks, financial intermediaries registered on the list provided by Article 107 of the Consolidated Code of Banking, Investment Management Companies and harmonized management companies may make offsite offers of their own investment services. If the offer relates to services provided by other intermediaries, the investment firms and banks must be authorised to perform the service provided by Article 1, paragraph 5, letter c).

5. Investment firms may make offsite offers of products other than financial instruments and investment services, the characteristics of which shall be established by Consob regulation, upon the advice of Banca d'Italia.

6. The effectiveness of contracts for the placement of financial instruments or for management of individual portfolios which are executed offsite or placed at a distance pursuant to Article 32 shall be suspended for a period of seven days starting on the date of the subscription by the investor. Within that period, the investor may give notice of such investor's withdrawal without charge or compensation to the financial promoter or to the qualified person; such right shall be stated in the forms delivered to the investor. The provisions above also apply to contractual proposals made offsite or at a distance pursuant to Article 32.

7. Failure to state the right of withdrawal in the forms shall result in the related contracts being null and void, with only the client having the right to enforce this provision.

8. Paragraph 6 does not apply to public offers to sell or to subscribe for shares with voting rights or other financial instruments which allow the purchaser or subscription of such shares, provided that the shares or financial instruments are traded in regulated markets in Italy or countries in the European Union…"

140. Article 1 of TUF defines "financial instruments" to include swaps and "investment services" to include proprietary trading and placement with or without prior underwriting of firm commitment i.e. the provision of a guarantee to the issuers.
141. It is a slightly curious feature of Article 30 that, while it purports to deal with offsite offers in its title, paragraph 6, which as we have said (together with paragraph 7) is the important paragraph for present purposes, relates to contracts "which are executed offsite". There is no debate in this case that Swap 6 which is the relevant swap was executed offsite because the formal proposal was sent by Prato to Dexia by fax and was likewise accepted by fax by Dexia. This last communication was received by Prato at its offices and therefore offsite from Dexia's offices.
142. The proposition of Italian law for which Dexia contended (and which it claims is supported by authority and the opinion of Professor Gentili) was that Article 30 did not apply when the initiative for the contract came from the customer and there was no risk or prospect of the customer being taken by surprise. To the extent that this principle is to be applied to contracts "executed offsite", that seems to be a considerable qualification to the actual wording of Article 30.6 but the judge accepted (and Prato did not challenge) that this was the effect of the decision of the Court of Cassation in Fideuram (2065/2012).
143. The main question decided in Fideuram was whether Article 30 by using the phrase "promotion and placement with the public" in its definition of offsite offer intended to refer merely to a placement with an unidentified public (the public at large) or whether it included a placement with an already identified investor to whom the offer was made. On 14^th February 2012 the Court of Cassation (consisting of 5 judges of the First Civil Section) decided that the Article was confined to offers of placement to the public at large and, therefore, that an individual investor to whom the offer was made could not take advantage of Article 30.
144. It was an important element of the case that the investor had made the relevant investment (the purchase of bonds from Fideuram) pursuant to a previous framework agreement between the investor and the bank whereby the investor was entitled to ask for further investments from time to time. This decision caused some controversy in Italian legal circles and the point was re-argued in the Mediolanum case (4521/2011) in front of the Joint Civil Divisions of the Court of Cassation consisting of 9 judges (including one of the previous 5 judges, Signor Carlo Piccininni) who this time decided on 3^rd June 2013 that Article 30 applied both to offers made to the public at large and to offers made to individual investors on a one-to-one basis. It is accepted that this later decision is the authoritative law on that point.
145. In paragraph 7(b) of the Fideuram case, however, the court, in considering the rationale (or, as the Italian lawyers put it, the "ratio legis") for the distinction made between investments made at the bank/offeror's premises and those made off such premises, said this:-

"The reason for this distinction between the two different categories of investors can be intuitively understood and can be clearly recognised in the fact that whoever goes to the offeror's with the aim of taking advantage of a saving has reached an unwavering determination about the utility of the initiative taken, a determination conversely not necessarily existing – or at least not always supported by adequate certainty – as a result of the initiative undertaken by the seller.

With the suspension, for the investor, of the effectiveness of the sale for a period of seven days, the legislature therefore deemed it possible to correct any negotiated distortions deriving from any effect of "surprise" experienced by the purchaser and to ensure, thus, a proper balance between the positions of the two contracting parties. From the foregoing it clearly follows, therefore, that, when the regulation of "ius poenitendi" is reasonably applicable, there has been a situation wherein the investor is exposed to the risk of taking action and of making poorly considered decisions. In point of fact, the Court of Appeals, with a reconstruction not contrasting with this consideration, ruled out that in the case at hand the hypothesis outlined above was manifest, having connected the purchase of securities by P. to the pre-existence of a previous relationship established between the same parties, that is to say, in a transaction framework substantially similar (by that aspect of the agreement noted here) to a contract of mandate. Thus, the fact that the purchase of securities did not take place out of the offeror's initiative, but as a result of a previous general agreement between the investor and the individual delegated to make the transaction, makes it apparent that the case at hand involves an assumption of trading, as found by the Court of Appeals, and not an assumption of placement, as claimed by the applicant."

146. The main question debated by the Italian lawyers at the trial before Walker J was whether this part of the decision in Fideuram survived the 9 judge decision in Mediolanum. The judge accepted Professor Gentili's evidence that the paragraphs quoted were separate and distinct reasoning that placement would not occur within the meaning of Article 30.6 "if the purchase does not take place out of the investment provider's initiative"; in other words if the initiative comes from the investor, Article 30 is inapplicable. Prato did not challenge on this appeal that that would be a correct statement of Italian law but for the later Mediolanum decision.
147. This later decision concluded that every kind of offsite investment was covered by Article 30. The judge quoted large parts of this decision, paragraphs 4, 6 and 7 of which it is necessary to repeat, adopting the judge's numbering of the sub-paragraphs:-

"4[.1] It is specifically the ratio legis that must be considered for determining the meaning of the law and therefore, for being able to define the applicable meaning as a consequence.

4[.2] The justification for the jus poenitendi [the right of withdrawal under article 30.6] discussed in the opinions of interpreters and in the learned commentators are sufficiently unambiguous: It is the fact that the investment transaction has been carried out by the broker off-site that makes it necessary that the retail investor has a special protection, that the legislation does not grant to professional investors, and this is made clear in the second paragraph of the cited article 30, as this means that the initiative does not usually originate from him. It is logical to assume in such cases that the investment is not the consequence of the said investor's premeditated decision, who would have visited the broker's office, rather it is the result of an offer from promoters which the broker takes advantage of: a solicitation that could therefore have surprised the investor and could have induced him to a trading choice that he had not carefully considered.

4[.3] Deferment of the contract validity, with the possibility of withdrawing in the meantime without any charge to the client, serves to make up for (retrospectively) the lack of appropriate prior reflection that the situation described could have caused.

4[.4] In the event that this, and it is difficult to dispute, is the need for protection that led the legislator to introduce the provision for withdrawal to financial instrument placing agreements executed by the broker off site, it is difficult to deny that the same need is relevant for transactions carried out in relation to the provision of an appropriate placing service (with the aforementioned meaning). Furthermore, the same is also true for any scenario in which the broker sells financial instruments off-site to retail investors. The latter is true even if performing a different investment service. The difference between the two stated scenarios is irrelevant especially when one takes into account that in the placing service "with an underwriting commitment", the broker is placing on the market financial products with regard to which his position and interest in the sale are wholly equivalent to a sale in his own right. This therefore confirms the opinion that the word "placing" in the text under examination is intended in a broad sense, namely as a synonym for a trading arrangement through which the client acquires the financial instrument and, therefore, it is included in his patrimony, that is (to use finance market language), in his portfolio. The latter is irrespective of the investment service type that has given rise to the transaction.

…

6. In favour of a broad interpretation of the cited provision of article 30 of the TUF, that is able to better ensure consumer protection, we have the general principles that can be deduced from the said consolidated text, which are surely inspired by the need for the specified protection to be effective. This is further supported by the provision of article 38 of the EU's charter of fundamental rights that, in guaranteeing "a high level of consumer protection", requires that ambiguous laws be interpreted in a way that is more favourable to the latter. Most of all, there is the difficulty of justifying, also in constitutional terms, the inequality of treatment between the scenario of the financial instrument off-site offer that is based on a different type of investment service provided by the broker, when, for the aforementioned reasons, the same situation is wholly equivalent to the scenario of increased vulnerability that the client finds himself in due to the fact that the offer is presented to him off-site, by the broker, or by the other subjects referred to in the first paragraph of the cited article 30.

7. Previous guidance expressed by this court on the matter under examination can no longer be followed, and it is necessary to state the principle whereby the right of withdrawal granted to the investor under article 30, paragraph 6 of Legislative Decree n. 58 of 1998 and the nullity of the agreements in which the right has not been contemplated (contained in the subsequent paragraph 7) applies not only when the broker's sale of financial instruments takes place off-site in the context of placing service provided by the said broker in favour of the issuer or subject offering the instruments, but also when the off-site sale takes place in execution of a different investment service where the same need for protection can be found."

148. Nothing was said in terms about the second ground of decision in Fideuram but Prato relied on the ratio legis of the importance of consumer protection and the statement that previous guidance expressed by the Court of Cassation was no longer to be followed in order to submit that the fact of initiation by the investor was no longer relevant. Dexia responded that protection of the consumer was not required if the initiative had come from the consumer and relied on the fact that there was no express repudiation of the second ground of decision in Fideuram. It also relied on a subsequent decision of the Court of Appeal of Bologna in the Municipality of C which said (obiter), after citing paragraphs 4[.2] and 4[.3] of Mediolanum, that the Municipality

"would in any case appear to lie outside the case of the ill-prepared consumer who may be caught by surprise by the intermediary … in view of the previous resolutions and negotiations and the same repeated nature of the contracts."

149. The judge considered the evidence of the Italian law experts in detail and, in the end, preferred the evidence of Professor Sciarrone Alibrandi for Prato that what was said in paragraph 4 of Mediolanum was inconsistent with an inquiry to determine whether the investor was in fact taken by surprise.
150. Dexia submitted that the judge should have preferred the evidence of Professor Gentili who in his first supplementary report said this:-

"6. Further, I should note that protecting customers from such approaches by requiring a short time period in which to consider the terms of any transaction has been a theme of European Union legislation since the implementation of Directive 85/577 CEE which concerns contracts negotiated away from business premises. In my view, Article 30 TUF is based on the consumer protection model originating from this Directive and applies that model to financial transactions. This means that the "jus poenitendi" (i.e. the right of withdrawal) applies to situations where the investor is exposed to the risk of making poorly considered decisions, which in my opinion usually but not always occurs in door to door selling situations. This risk is to be presumed where the approach to the customer is unsolicited (i.e. in the case of cold calling), but in my view it can be excluded when the initiative for the proposal of contract originates from the investor. "

He then referred to both Fideuram and paragraphs 4.2 and 7 of Mediolanum emphasising that the rationale (ratio legis) for the right of withdrawal within 7 days in offsite cases was that in such cases the resulting contract is not the consequence of the investor's premeditated decision and was a solicitation from the bank or broker.

151. The judge found it difficult to accept this evidence since the fact that the rationale for Article 30 was to protect the investor from unsolicited offers did not necessarily mean that the article was not to apply to contracts executed offsite but made after the solicitation for the contract came from the investor and Professor Sciarrone Alibrandi had made precisely this point in her written evidence (Report 30^th April 2014) para 17:-

"As stated by Professor Gentili decision No. 13905 [Mediolanum] also addresses the question as to whether the investment services falling within the scope of Art 30 para 6 must be unsolicited, but this issue cannot be considered the central focus of the decision which is mainly devoted to the clarification of the concept of placement. However, decision 13905 states that the need for the protection mentioned can be found where a retail investor is not put in a position to properly evaluate the investment proposed and, thus, to make an informed decision. According to the Supreme Court, this usually ("di regola") happens when the investment service is unsolicited."

She then added that the use of the word "usually" in para 4.2 of Mediolanum made clear that the Article was not limited to situations when the investment was unsolicited by the customer.

152. The battle lines were thus drawn, although they unfortunately escaped detailed attention in the Joint Memorandum signed by the experts about matters on which they agreed and disagreed. Both experts were, however, cross-examined and the judge carefully considered the various points made by each expert in the course of that cross-examination in paragraphs 230-242 of the first judgment. He then considered the closing submissions and said (para 246) that the features of Mediolanum which had been put to Professor Gentili (including the significance of the word "usually")

"have been demonstrated to show that the Joint Chambers considered that the legislature had decided upon a clear rule that the execution of the contract off-site, because of the risks that it carried, should be the criterion which would lead to a requirement for a seven day cooling off period and for this to be stated in the relevant forms."

153. The judge then dealt with the point made that, if Prato and Professor Sciarrone Alibrandi were correct, a right of withdrawal would exist when there was no need for the protection of the Article and said (para 247):-

"This too fails to address the passage in Mediolanum in which the Joint Chambers make it clear that it is the risks associated with execution of contracts off-site that justify the protection afforded by article 30.6 and 30.7. What is said by the Joint Chambers in paragraphs 4[.2] and following is simply inconsistent with a ratio that there should be an inquiry into the particular circumstances of the case in order to ascertain whether the investor was or was not taken by surprise."

154. It seems to us not merely that this was a conclusion to which the judge was entitled to come on the evidence which he heard but also that the judge had exposed an important latent ambiguity in Dexia's argument. It was never made clear, until the oral argument in this court, exactly what Dexia's case was. Professor Gentili's evidence was that Article 30 did not apply

"when the initiative … originates from the investor."

The judge thought that the question of fact to which Dexia was requiring an answer was whether

"the investor was or was not in fact taken by surprise."

This ambiguity was not resolved in Dexia's skeleton argument for this court which asserted (para 50) that Article 30 only applied

"where the initiative for the transaction comes from the customer, such that the bank's proposals are not unsolicited and there is no prospect of the customer being taken by surprise."

When pressed by the court Mr Handyside for Dexia rowed back somewhat and came up with the formula that the Article did not apply

"when the initiative comes from the customer and there is no prospect of the customer being taken by surprise."

155. However the proposition is formulated, there is no escaping the conclusion that Dexia's proposition does require a factual inquiry (a) about where the initiative comes from and (b) whether the investor was taken by surprise (or whether there was a prospect of his being taken by surprise). It is this that Professor Sciarrone Alibrandi was unwilling to countenance and paragraph 247 of the judgment shows the judge, for good reason, agreed with her, though it should be noted that Prato makes no suggestion, on the facts of this case, that the initiative in fact came from Dexia.
156. Dexia made various points on the oral evidence and also on the obiter remarks, which we have set out above, in the case of Municipality of C but neither those points nor the C decision persuaded the judge to take a different view. It is difficult for this court to differ from a judge who has heard complex evidence of foreign law as a whole, taken time to consider it and has carefully considered the points made. In these circumstances, Dexia's attack on the judge's conclusion on Article 30 must fail.
157. It may be added that Professor Gentili's reference to EU Council Directive 85/577 is instructive. We were provided with a copy of that directive enacted "to protect the consumer in respect of contracts negotiated away from business premises." The operative article (Article 4) of that directive gives no hint that the requirement to give written notice of the right of cancellation is not to apply if the initiative comes from the consumer; it would be odd if Italian law was inspired by that directive but was more generous to the bank providing investment services without saying so expressly.
158. If, therefore, we were wrong about the application of Article 3(3) of the Rome Convention and it were necessary to apply mandatory rules of Italian law, we would hold that the absence of a clause in either the ISDA Master Agreement or the swap contracts themselves would, pursuant to Article 30.7 of TUF, make the contracts null and void at Prato's option and unenforceable by Dexia.
159. We will deal with the argument about Articles 32 of TUF and 30 of CR more shortly since they only become relevant on the double contingency that the judge was right about Article 3(3) of the Rome Convention (which we do not think he was) and that we ourselves are wrong about Article 30.

(2) Article 32 – Distance Marketing

160. Article 32 provides:-

"Distance marketing of investment services and activities and financial instruments

1. Distance marketing techniques shall mean techniques of contacting customers, other than advertising, which do not involve the simultaneous physical presence of the customer and the offeror or a person appointed by the offeror."

Article 30.6 provides for a 7 day right of withdrawal not only for contracts executed offsite but also for contracts "placed at a distance pursuant to Article 32" as well as for "proposals made at a distance". The question therefore is whether the techniques adopted by Dexia did "not involve the simultaneous physical presence of the customer (Prato) and the offeror (Dexia)".

161. The puzzle here is that Swap 6 clearly did involve the simultaneous physical presence of Prato and Dexia since the day before Prato resolved to approve the restructuring employed by Swap 6 and 15 days before Dexia accepted Prato's irrevocable proposal, there was a meeting between Dexia and the Committee responsible for what became Swap 6, described by the judge in para 104 of his first judgment in the following terms:-

"104. On 14^th June 2006, there was a meeting of Prato's standing committee number 2, concerned with planning and organization. In attendance was Ms de Castelli, along with Mr Sommavilla and Mr Poddighe. It was explained that Prato wanted to reduce current expenditure and that the Council had adopted a strategy that saved €1.5 million over the previous 4 years and would release up to €7 million over the next 3 years, "easing pressure on the budget". Mr Sommavilla said that Dexia had proposed solutions "to manage interest rate risk" and that "short and long rates were still close to an all-time low"."

How then can it be said the contract made a few days later did not "involve the simultaneous presence of Prato and Dexia"? The contract itself may have been made by an exchange of faxes but one might think that Dexia's techniques did "involve" a simultaneous physical presence.

162. At least on this point, the joint memorandum of the experts did join issue, albeit together with Article 30:-

"22. We do not agree as to when Art. 30 paras 1, 6, 7 and Art. 32 para 1 TUF apply. The reasons for this disagreement are set out below.

23. Professor Sciarrone Alibrandi thinks that Art. 30 para 1, 6, 7 and Art. 32 para 1 TUF apply to any contract agreed not at the intermediary office or by distance marketing techniques (such as an exchange of correspondence).

24. Professor Gentili thinks that they only apply to unsolicited activities by an intermediary towards the public in general (rather than a specific investor) and that they do not apply where a party has been appointed as an advisor to another and the parties are in on-going professional relationship with direct contacts at their respective offices."

163. By the conclusion of the trial Professor Gentili had resiled from the assertion that Article 32 only applied to unsolicited offers (thus allowing Prato to rely on the oddity of his view on that matter in relation to Article 30 when his view did not apply to Article 32), but he had not dropped his view that Article 32 did not apply when one party had been appointed as an advisor and the parties were in an on-going relationship with direct contracts at their respective offices.
164. The judge seems to have thought (para 85) that the fact that Prato executed its irrevocable offer at its offices before sending it to Dexia meant Dexia had adopted techniques which did not "involve" their simultaneous physical presence. But we cannot accept that; because one must look to the techniques as a whole and, if one does that, physical presence was "involved" only a day before Prato decided in principle to go ahead with Swap 6.
165. The judge (paras 89-90) then characterised Professor Gentili's evidence as accepting that references in Article 30.6 to contracts placed at a distance applied whether or not the initiative came from the customer, subject to a proviso "that there must never have been any direct contact". That seems to us consistent with the Joint Memorandum which stated that Article 32 did not apply where the parties are in an on-going relationship with direct contact. He then characterised that as Professor Gentili's "concept of exclusivity" of distance contact. But the Professor was not saying that one short meeting during a prolonged negotiation would necessarily preclude a holding of distance marketing. On a fair reading of his evidence he was saying that the present case was not a case where Dexia adopted distance marketing techniques. That is the common sense of the matter and, in a case in which it was agreed that there were no relevant decisions of Italian courts, the judge was entitled and, we think, ought to have used his judicial common sense in line with the last sentence of para 51 of Morgan Grenfell which we have cited in para 40 above.
166. If therefore it were the case, contrary to our view, that Prato cannot rely on Article 30, we do not think it can rely on Article 32. This is just not a case of distance marketing at all.

Combination of Article 23.1 of TUF and Article 30 of CR

167. Article 23.1 TUF provides:-

"1. Contracts relating to the providing of investment and accessory services shall be drawn up in writing and a copy provided to clients. The Consob, upon the advice of Banca d'Italia, may provide by regulation that, for justified technical reasons or in relation to the professional nature of the contracting parties, particular types of contracts may or must be entered into another form. Contract which do not adhere to the prescribed form shall be null and void."

168. Article 30 of CR (made pursuant to Article 23.1 of TUF) provides:-

"1. Authorised intermediaries may not supply investment services except on the basis of a contract in writing: a copy of the contract shall be given to the investor.

2. The contract with the investor must:

a) specify the service provided and their characteristics;

b) establish the period of validity of the contract and the procedure for renewing it, and the procedure for modifying the contract;

c) specify the procedures by means of which the investor may give orders and instructions;

d) establish the frequency, type and content of the documentation to be sent to the investor to report on the activity carried out;

e) specify and regulate, with reference to contracts for trading and the reception and transmission of orders, the procedures for providing and replenishing the means for carrying out or guaranteeing the transactions ordered, with the means provided for carrying out transactions involving derivative financial instruments and warrants indicated separately;

f) specify any other contractual conditions agreed with the investor for the supply of the service."

Prato relied on (c), (d) and (e).

169. Dexia's case was that if it was not open to the investor to give orders and instructions, if there was no documentation which was "to be sent to the investor to report on activity carried out" and if there were "no procedures for providing … the means for carrying out … transactions involving" swaps, there was no way that the procedures for such orders, the type or content of documentation or the procedure for providing the means of carrying out the swaps could be specified in the Master Agreement and that therefore it was not necessary to do so.
170. The judge responded to this by saying (para 101 of his second judgment):-

"Nor is there good ground to think that the ratio legis is that the stipulated information should be provided only where the provision of that information is objectively necessary on the facts of the case. On the contrary, an important purpose of article 23.1 TUF is to enable CR "for justified technical reasons or in relation to the professional nature of the contracting parties" to prescribe what must appear in particular types of contract."

171. We cannot accept this. If it is impossible to prescribe procedures or documentation on the basis that they do not exist, it cannot be justifiable for "technical reasons" to prescribe that they must appear in the contract. The court asked Mr Davies-Jones to indicate broadly what the prescribed terms would have to say in order to make the Master Agreement valid but no satisfactory answer was forthcoming. Once again we consider that the judge was entitled to use (and should have used) his common sense in relation to this matter.
172. If, therefore, Prato cannot, for any reason, rely on Article 30 of TUF, we do not consider it can assert the invalidity of the swaps by relying on Article 30 of CR.

Illegality

173. Prato had one last arrow in its capacious quiver. If all else failed it asserted it was illegal for it to perform the swaps by reason of Article 30 (and, if relevant, Article 32 and Article 30 CR) and it relied on Ralli Bros v Aznar [1920] 2 K.B. 287 to say that it was not therefore liable to Dexia.
174. The short answer is that there is nothing in the Article that makes it illegal to pay Dexia sums due under the swaps. The swaps may be null and void at Prato's option but there is nothing illegal about it making payment, if it decides (or is ordered) to do so.

Prato's counterclaim under Article 30 TUF

175. On the basis that Article 3(3) of the Rome Convention did not apply, but that Dexia was in breach of its obligations under Article 30 TUF, Prato advanced an argument before the Judge that it was entitled to counterclaim for damages on the basis of a statutory tort arising from Dexia's breaches of its obligations under Articles 30 and/or 32 TUF.
176. In his second judgment Walker J dismissed Prato's counterclaim for damages as there was no evidence that Prato would have availed itself of the right to withdraw from the swaps contracts if the right of withdrawal had been stated. He therefore concluded that Dexia's breach had caused no loss to Prato.
177. On the present appeal Prato raised two arguments as to why the Judge was wrong in his conclusion. First, it was said that he failed to recognise the nature of Prato's right to claim damages under Article 30 TUF; and secondly, that he failed to address an argument that English law should fashion a remedy which vindicated Prato's Italian law claim based on Dexia's breach of Article 30 TUF, either by declaring the swaps null and void, or by fashioning a remedy in damages to equivalent effect.
178. It was common ground that (1) a claim for damages for breach of statutory duty was potentially available under Italian law for breach of Article 30 TUF; (2) any such claim for damages would be characterised as a claim in tort for choice of law purposes; and (3) the claim would be governed by Italian law.

Prato's first point: damages for breach of Article 30 TUF

179. Mr Davies-Jones argued that the Judge misunderstood the effect of Article 30 TUF by adopting an unwarranted precondition: that a claim for damages for breach of Article 30 could only succeed if Prato proved that it would have exercised its right to withdraw from the swaps if Dexia had complied with its obligation to give written notice of Prato's 7-day right to do so. He submitted that the implication of such a precondition was inconsistent with the statutory purpose underlying Article 30 and, in particular, the terms of Article 30(7) which provided for a primary and expressed remedy of nullity without Prato having to prove anything further.
180. The statutory purpose of consumer protection inherent in Article 30 would not be achieved if the right to claim damages was confined to those few cases in which a counterparty could prove that it would have withdrawn from the transaction within 7 days had that right been stated. Mr Davies-Jones relied on the statements in Mediolanum (see above) to the effect that Article 30 should be interpreted so as better to ensure consumer protection. He also submitted that the judge had failed to give proper effect to the analysis of Prato's civil law expert that the breach in the present case was "the conduct of the bank which caused the entry into contracts which did not set out the right of withdrawal [as required by Article 30 TUF]"; or, to put it another way, the loss that was caused to Prato was the entering into swaps that should never have been entered into.
181. On this basis, Prato's damages would comprise the sum of all the losses that have accrued, and will continue to accrue, as a result of entering into Swap 6.
182. In addition, Prato advanced an argument that it was simply too late for Dexia to raise the precondition argument which the Judge had accepted. It had not been advanced until 21st October 2015 (over a year after the trial) and had never been put in cross-examination to Professor Sciarrone Alibrandi, whose report dealing with damages for breach of Article 30 had not been challenged.

Discussion on point 1

183. It is convenient to start with the last point. The circumstances in which the judgments were handed down have already been set out. It is clear that a causation point was raised by Dexia in relation to the counterclaim before the first judgment and that there was a period when it should have been (but was not) addressed further prior to the handing down of the second judgment. However, the omission was belatedly recognised by Dexia and was addressed and argued before the second judgment was handed down (see second judgment [367] and [373(1) & (2)]). Walker J addressed those arguments in his second judgment (see below). In our view there is nothing in this point.
184. In Part F7 of the second judgment at [366]-[379], the Judge dealt with the issue of what, if any, damages Prato could recover for Dexia's failure to satisfy the requirement of Article 30.6 TUF. He noted Prato's reliance on the evidence of Professor Sciarrone Alibrandi (Sciarrone Alibrandi 1) at para 85:-

"In addition to the nullity of the related contract, the conduct of the bank which caused the entry into of contracts which did not set out the right of withdrawal is regarded as bad faith conduct which also gives rise to a liability for damages against another party."

185. Two further points may be noted about para 85. First, support for this proposition was said to be found in a footnote reference to two cases: judgment n.14/62 of 3rd October 2003 (Court of Cassation: Dante) and judgment 10th December 2004 (Tribunal of Mantua: F & C). Secondly, it is common ground that 'bad faith' in this context did not have the same implications that it has in English law.
186. The general statement as to the recoverability of damages was common ground, but did not answer the question as to the nature of the claim for damages. Dexia's argument was that Prato needed to prove that it would not have entered into (or would have exercised its right within 7 days to withdraw from) the swaps, if Dexia had complied with its obligation to give notice of a 7-day right of withdrawal.
187. The Judge referred to para 44 of the second report Professor Gentili (Gentili 2) in which he had said:-

"Under Italian law, establishing causation is an essential requirement of liability. Damages can only be awarded if it can be shown that they are a direct consequence of an unlawful act or omission. Therefore, in order to recover damages for a breach of TUF … the claimant must prove his losses come directly and exclusively from the unlawful act or omission …"

188. The Judge noted that this passage had not been challenged in cross-examination; and that Professor Sciarrone Alibrandi had conceded that it was correct.
189. At [374] the Judge addressed Prato's argument, that Dexia's breach consisted of entering into contracts which did not set out the right of withdrawal and, by entering into contracts which should not have been entered into at all, had caused Prato to suffer the net losses it claimed. The Judge pointed out that the breach under Article 30 TUF consisted of the failure to state the right of withdrawal on the relevant forms. The Judge also addressed Prato's further argument that, if a counterparty had to prove causation then the availability of a claim for damages would be purely academic. He pointed out that if a claimant could show that it had had second thoughts about the transaction within a few days of entering into the transaction, it might be able to establish a causative link. In fact, no second thoughts occurred to Prato until the defence and counterclaim was served in the English action.
190. At [376]-[377] of the Second Judgment, the Judge considered Prato's argument based on the two footnoted cases cited by Professor Sciarrone Alibrandi (Dante and F & C). He noted that they had not been cited in support of the proposition that it was unnecessary to prove causation, and found that they were not in point.
191. The Judge concluded at [378]:-

"In my view the propositions advanced in Gentili 2 at paragraph 44 are clearly established. They were not overtaken by the Civil Joint Memorandum; on the contrary, they were advanced at a stage when the Civil Joint Memorandum had already been prepared and signed. There was no objection to those propositions being put to Professor Sciarrone Alibrandi in cross-examination. When they were put to her she agreed with them. There is nothing inconsistent with those propositions in paragraph 85 of Sciarrone Alibrandi 1 or in the two cases cited in that paragraph. This is not a case in which Prato had 'cold feet' within the period when a right of withdrawal would have been available. There is no reason to think that if Prato had been informed of that right it would have made use of it. In these circumstances, I conclude that the only breach shown to have occurred of relevant regulatory provisions caused no loss and gives rise to no claim in damages."

192. Mr Davies-Jones made a number of criticisms of this part of the Judgment.
193. First, he submitted that it was clear as a matter of Italian law that a breach of Article 30 entitled the client to set aside the contract and claim damages. Secondly, para 44 of Gentili 2 was expressed in very general terms and was not specifically addressing Article 30 TUF. Thirdly, the Judge had failed to understand the point made in para 85 of Sciarrone Alibrandi 1. Her point was that once the contract was made the damage had occurred and the only remaining issue was the calculation of that damage. Causation was established when Prato enter into the swap contract. This proposition had been expressed in Sciarrone Alibrandi 1 at para 150 and was repeated by her in cross-examination:

"… in the sector of financial markets where financial instruments are involved, we come across the proposition of damno in res ipso. That is that the extent of the damage is equal to the loss resulting from the instrument itself."

194. Mr Davies-Jones referred to one of the two cases referred to in a footnote to para 150: 28th March 2012 (Milan Court of Appeal: DB s.p.a v. GI.DL) which itself referred to another earlier decision of the Court of Milan dated 14th February 2009, in support of the proposition that the legal ban on unsuitable transactions in the absence of specific warnings makes the hypothetical will of the investor irrelevant. He accepted that the Judge had not been referred to this case and that neither expert had been asked about it.
195. In our view Mr Davies-Jones's first criticism is not made out. The Judge had proceeded on the basis that Article 30 TUF gave a client the right under Italian law to treat the contract as null and void, and to claim damages. The question which the Judge was considering was the circumstances in which the right to claim damages could succeed.
196. So far as the second criticism is concerned, the Judge was entitled to accept the clear and unchallenged statement of law in para 44 of Gentili 2, in the light of the principles set out earlier in this Judgment.
197. As to the third criticism, one of Prato's difficulties is that the point was never put to Professor Gentili, and this may be because Prato's pleaded case did not include the assertion that Prato's damage was entering into the swaps. Prato's counterclaim at para 64 asserted that: "But for the breaches pleaded above, and any of them, [Prato] would not have entered into any of the transactions." Furthermore, as Mr Handyside pointed out, the two footnoted cases relied on to support Sciarrone Alibrandi para 150 were cases involving provisions which prohibited entering into contracts. Mr Handyside added that this may explain the result in those cases. He may be right, but the important point is that these were not points that were explored in the evidence. Prato's case at trial was the case which the Judge dealt with in the last sentence of [378]. Prato's present point was not its case at trial.
198. Our conclusion on this issue is that there are no proper grounds for challenging the trial Judge's clearly expressed conclusion, based on the arguments deployed before him and in the light of the expert evidence deployed before him.

Prato's second point: the remedy for breach of Article 30 TUF under English law

199. Prato argued that the Judge failed properly to take into consideration that under Italian law the primary remedy for an infraction of Article 30 TUF was nullity; and that English law as the lex fori, was able, and bound, to fashion a remedy which replicated the effect of nullity. Mr Davies-Jones submitted that the relevant principles were the common law principles set out in Dicey, Morris and Collins (15th edition) at 7-011:-

"As a matter of English common law, the nature of the remedy is a matter of procedure to be determined by the lex fori …"

and 7-012:-

"Generally speaking the common law principle that the forum grants its own remedies in respect of wrongs governed by a foreign law only applies if two conditions are satisfied. First, the lex causae must give the claimant some remedy against the defendant in respect of a wrong similar in character to that alleged in the English proceedings. Secondly, the English remedy sought must 'harmonise with the right according to its nature and extent as fixed by the foreign law.' Thus English remedies will be refused if they are so different from those provided by the lex causae as 'to make the right sought to be enforced a different right.' Although an action in England will not fail merely because the claim is unknown to English law, it will fail if English law has no appropriate remedy for giving effect to the claimant's alleged foreign right."

Discussion on point 2

200. There are two initial difficulties with the case as now advanced by Prato: first, the claim was not pleaded in this way, and secondly it was not raised or argued below.
201. In answer to the first point, Prato submitted that its claim should not be defeated on what is essentially a procedural point. Prato had pleaded in its counterclaim that the breach of Article 30 TUF resulted in the nullity of the relevant transaction, and counterclaimed for damages and an indemnity. Mr Davies-Jones submitted that the court could grant a remedy to which Prato is entitled even if that remedy were not specified in the claim form, see CPR Part 16.2(5) and In re Vandervell's Trusts (No.2) [1974] 1 Ch. 269, Lord Denning MR at 321H: "It is sufficient for the pleader to state the material facts. He need not state the result." We accept that submission, so far as it goes.
202. The second point is more problematic. The Judge heard evidence and oral submissions over 18 days. He received submissions from Prato which ran to many hundreds of pages (opening submissions: 160 pages; closing submissions: 300 pages) and some of the points were also developed in subsequent written submissions. The first judgment ran to 260 paragraphs and his second judgment to 408 substantive paragraphs. Even by the standards of Commercial Court litigation, Walker J was addressed on (and required to deal with) a very large number of issues. Prato's present point was not one of them.
203. In our view, commercial litigation must necessarily proceed on the basis that all points that the parties consider to be material are argued and considered by the Judge. It is both wrong in principle and wasteful of court resources (which must be deployed in the interest of all court users) for arguments to be reserved to this Court, rather than being deployed at the time and before the Court that they should have been. On that basis alone we are strongly resistant to hearing Prato's second point.
204. Nevertheless, and despite our considerable reservations, we have considered the argument on its merits.
205. Article 8 of Schedule 1 of the Contracts (Applicable Law) Act 1990 - the Rome Convention provides:-

"Material Validity

1. The existence and validity of a contract, or of a term of a contract, shall be determined by the law which would govern it under this Convention if the contract or term were valid."

206. The question of whether a contract is a nullity or is void (and may be declared so) is a matter concerning the validity and enforceability of contractual obligations; and is therefore governed by the choice of law rules in the Rome Convention. As we have already noted, by Article 3(1) of the Rome Convention, that law is English law. It follows that an English Court will not consider the validity of the swaps other than as a matter of English law; and will not give effect to an argument that the contracts are invalid or unenforceable as a matter of Italian law. There can be no issue that, as a matter of English law, the contracts were valid and Prato are not entitled to a declaration of nullity of the contracts on the basis of the tort claim advanced as a matter of Italian law. As Mr Handyside expressed it in argument: Italian law is irrelevant to the validity of the swaps.
207. That leaves Mr Davies-Jones's alternative argument that English law should fashion a remedy in damages which harmonises with its rights under Italian law. The authority cited in support for the opening part of Dicey, Morris and Collins's formulation at 7-012 is Phrantzes v. Argenti [1960] 2 QB 19 (Lord Parker LCJ) at 35-36:-

"It is true, of course, that a plaintiff seeking to enforce a foreign right here can demand only those remedies recognised by English law, and that the claim will not be defeated merely because those remedies are greater or less than those in the courts of the foreign country … But the remedies available must harmonise with the right according to its nature and extent fixed by foreign law …"

208. Phrantzes v. Argenti was a case in which English law had no suitable remedy for breach of the foreign law duty.
209. Prato submitted that, since it was the opinion of the experts on Italian law, as expressed in the joint memorandum, that "failure to indicate the right of withdrawal in forms shall result in the nullity of the … contracts", the Court must fashion a form of relief which harmonises with this right. If the Court cannot make a declaration of nullity, the remedy which most closely harmonises with the right under Italian law is the award of damages in respect of the past losses that have accrued and an indemnity against future losses as a result of entering into Swap 6. Mr Davies-Jones described this relief as "analogous to nullity". He submitted that the Court would not technically be awarding the remedy of nullity but would be fashioning its own remedy as damages "analogous to nullity" and "the practical effect of which would be the same as nullity".
210. However, putting the argument in this way, does not get around the difficulty that the remedy is still founded on a foreign tort which impugns the validity of the contracts. The position would of course be different if Prato were able to prove loss which did not depend on asserting that the contracts were null, but for reasons already outlined it is not able to do so.
211. For these reasons, we reject Prato's second point.
212. We would add that the reasons for dismissing the appeal in relation to Article 30 TUF also apply to any appeal founded on Article 32 TUF.

Overall conclusion

213. Our overall conclusion is:-

1) Prato had capacity to enter the swaps;

2) mandatory rules of Italian law do not apply;

3) if they were to apply, only Article 30 TUF would defeat Dexia's claim;

4) there is no illegality defence to Dexia's claim;

5) Dexia is, therefore, entitled to judgment;

6) Prato's counterclaims all fail; and

7) there is no basis for either Dexia or Prato to make a restitutionary claim.

214. This is the judgment of the court to which all members have made substantial contribution.

The order on hand down was:-

1) to give judgment for the principle sum due of €12,017,611.55 with liberty to apply for assessment of interest;

2) Prato to pay 90% of Dexia's costs of trial and appeal;

3) interim payment of €2.5 million

4) payment of sums in (1) and (3) by 31st July 2017;

5) permission to appeal to Supreme Court is refused.

The reason for the costs order is that, on any view, Dexia was the overall winner in a case in which Prato ran a considerable number of defences which, in the event, became irrelevant.