Mr Justice Hamblen:
Introduction
The Claimants Depfa Bank plc and Dexia Crediop SpA are Irish and Italian
banks. The Defendant is an Italian local public body.
The Claimants sue the Defendant in respect of two interest rate swap
agreements (“the Swap Contracts”). They assert jurisdiction under Article
23 of the Judgments Regulation on the grounds that the Swap Contracts
contain an English court jurisdiction clause. The Defendant challenges
jurisdiction on the basis that both actions are “principally concerned”
with matters over which the courts of Italy have exclusive jurisdiction by
virtue of Article 22(2) of the Judgments Regulation. That is because the
Defendant's decisions to enter into the Swap Contracts were allegedly
invalid.
Factual background
In September 2006, the Defendant launched an unofficial tender process
to restructure its indebtedness in a maximum amount of EUR 99.870,000.
As appears from the call for tender, the Defendant's aims were (1) to
reduce the annual instalments for the repayment of its existing loans, (2)
to revise the interest rate applying to its existing debt, through innovative
financial instruments with predetermined risk profiles and amounts, and
(3) to take advantage of the then favourable long term interest rates. The
Claimants submitted a bid to the Defendant.
On 23 January 2007, the Province Council of the Defendant resolved,
among other things, to enter into a debt restructuring transaction that
had been proposed by the Claimants whereby the Defendant would
undertake a bond issue. The bonds would pay interest at a floating rate
of EURIBOR + 0.063 %, and the Defendant would enter into a derivative
instrument in order to protect itself against future interest rate rises.
The recitals to the resolution referred expressly to (among other things)
Article 41 of Law 448/2001 and to the Ministry of the Economy decree
389/2003, as well as to the fact that the Claimants' proposal had been
considered by a Technical Commission that had been set up by the
Defendant in order to evaluate the bids received.
By an Executive Decision dated 16 February 2007, the Director (or Chief
Financial Services Officer) of the Defendant, Paola Fioravanti, resolved
(among other things) to assign the debt restructuring operation to the
Claimants in accordance with the Province Council's resolution dated 23
January 2007.
On 7 June 2007, the Province Council resolved (among other things) to
approve the issue of a bond for the maximum nominal amount of EUR
100.000,000, maturing in 2024 and paying a floating annual interest
rate of 6 month EURIBOR plus 0.063 %, and to approve the Claimants as
underwriters of the bond. In addition, the Council resolved “to complete
financial derivative transactions against the said bond loan for the
purpose of covering interest rate risk, in compliance with provisions
contained in Article 41, Law no. 448 of 28 December, 2001, in Ministerial
Decree 389/2003 and in the 2007 Finance Law.”
The Council also acknowledged that the transaction documents would be
forwarded, prior to their execution, to the Treasury Department of the
Ministry of Economy and Finance.
By an Executive Decision dated 22 June 2007, the Director (Ms Fioravanti)
resolved definitively to award the bond transaction, as well as completion
of the derivative financial instrument transactions, to the Claimants on
a 50:50 basis. By a further resolution dated 3 July 2007, the Director
resolved (essentially) to approve the entering into of interest rate
swaps with the Claimants which, at the request of the Defendant, were
structured so that they would cap the Defendant's interest rate exposure
under the bond at 5.99 %. The Director expressly acknowledged (at
paragraph 9 of the resolution) that the swap transactions were in line with
Ministerial Decree 389/2003.
On 28 June 2007, the Defendant issued floating rate notes named
“Provincia di Pisa 2007-2014 a tasso variabile” in an amount of EUR
95.494,000 (“the Bond”). The Bond had a scheduled maturity date of
2024, with the option of early repayment by the Defendant without
incurring a penalty.
On about 4 July 2007, the Defendant entered into the Swap Contracts
with the Claimants. The effect of the Swaps Contracts is equivalent to
imposing a cap and a floor on the amount of interest that the Defendant
has to pay in respect of the Bond between June 2007 and December
2024. The cap is set at 5.99 %, the floor at 4.64 %. Thus where EURIBOR
exceeds 5.99 %, the Claimants must pay the Defendant an amount
by which the EURIBOR rate exceeds 5.99 % multiplied by the notional
amount under the relevant swap (the Swap Contracts are structured
such that the notional amounts under the swaps from time to time
will equal the notional amounts then outstanding under the Bond).
Conversely, where EURIBOR is less than 4.64 %, the Defendant must pay
the Claimants an amount by which EURIBOR is below 4.64 % multiplied
by the notional amount under the Swap Contracts.
The Swap Contracts are documented as follows:
1.1 The terms of the swap between Depfa and the Defendant are
contained in an ISDA Master Agreement dated as of 15 June 2007, a
Schedule to the Master Agreement and a confirmation dated 5 July 2007.
1.2 The terms of the swap between Dexia and the Defendant are set out
in an ISDA Master Agreement dated as of 4 July 2007, a Schedule to the
Master Agreement and a confirmation dated 4 July 2007.
The parties expressly chose English law to govern the Swap Contracts.
The Swap Contracts also contain English jurisdiction clauses, which confer
exclusive jurisdiction upon the English courts so far as proceedings within
Member States are concerned.
The parties initially operated the Swap Contracts in accordance with their
terms. During the period 28 June 2007 to (but excluding) 28 December
2007, the EURIBOR rate was such that Depfa and Dexia were obliged,
under the Swap Contracts, to pay the Defendant EUR 12.986.39 and EUR
11.285 respectively on 28 December 2007. The Claimants made those
payments, and the Defendant accepted them.
On the next two payment dates (28 June 2008 and 28 December 2008),
EURIBOR was above the floor but below the cap. Consequently, no party
was obliged to make any payment to any other under the Swap Contracts.
However, on 23 December 2008, EURIBOR was fixed in respect of the
next 6 month calculation period commencing on 28 December 2008.
The Defendant was in a position to know from this date that it would be
obliged to make payments to the Claimants on 28 June 2009.
By a letter dated 5 June 2009, the Director-General of the Defendant, Mr
Palagi, wrote to the Claimants challenging the enforceability of the Swap
Contracts. In the letter, Mr Palagi made the following points:
(1) He reserved “every right” under the Swap Contracts, and made
reference to what he asserted were well-known economic difficulties that
had affected Depfa.
(2) He claimed that an analysis of the Swap Contracts had revealed that
there was an imbalance between the value of the cap purchased by the
Defendant and the floor sold by it. Mr Palagi claimed that this imbalance
amounted to EUR 638.500 (on a mid-market basis) in the Claimants'
favour, and that the failure by the Claimants to pay this amount to
the Defendant represented “an implicit cost of the transaction that is
unacceptable for the Authority I represent.”
(3) He complained that the Claimants had never disclosed that the Swap
Contracts had had this implicit cost, and that this cost wiped out the
economic benefit (or 'economic convenience') of the Bond transaction,
“with every consequent effect on the validity of the transaction in
question.”
(4) He asserted that the (alleged) negative value of the Swap Contracts
was contrary to Article 3 of Ministerial Circular of 27 May 2004, because
the Circular only permitted caps and floors where the floor was sold solely
to finance the acquisition of the cap. This was contended to mean that the
value of the cap bought had to be equal to the value of the floor sold.
(5) He asserted that, in view of the matters referred to above, the Swap
Contracts were “divorced from their original purpose (namely hedging the
interest rate risk) and transformed... into transactions which were also of
a merely speculative nature...”.
(6) He asserted that in the absence of a framework contract between the
Claimants and the Defendant setting out the nature of the services to be
provided by the Claimants, the Swap Contracts were null and void.
(7) He asserted that the Claimants had acted in breach of a number of
regulations which, he suggested, “may have contributed to causing a
major and very serious loss for the Authority”. The obligations under the
regulations that were alleged to have been infringed included “duties of
diligence, propriety and transparency in the customers' interest and for
market integrity, obligation to acquire all necessary information from
customers and to operate in a manner so that they are always adequately
informed.”
(8) Finally, he concluded his letter by requesting the immediate writing-
off of the Defendant's debt and by warning the Claimants against claiming
payment of the next six-monthly amount due. He invited the Claimants to
contact the Defendant within 5 days, failing which the Defendant would
take “every appropriate legal measure to protect the interests and rights
of the Province of Pisa.”
The Claimants subsequently met the Defendant, but the Defendant
continued to indicate that it would not make any payments due from it
under the Swap Contracts.
In view of these developments, the Claimants each issued proceedings
against the Defendant on Friday 26 June 2009. At that point, no sums
were due and payable to the Claimants under the Swap Contracts
(the next payment date was 28 June 2009) and the relief claimed was
accordingly limited to declaratory relief.
The issue of the proceedings apparently came to the attention of the
Defendant almost immediately. On Saturday, 27 June 2009, Mr Vulcano
telephoned Mr Baratella of Dexia and informed him that the Defendant
was aware that proceedings had been commenced by the Claimants.
By an Executive Decision taken on the next working day, Monday 29 June
2009, the Director, Ms Fioravanti, purportedly resolved to cancel, with
retroactive effect, her decisions of 16 February 2007, 22 June 2007 and
3 July 2007 insofar as they related to financial derivatives instruments
(i.e. the Swap Contracts). This purported revocation by the Defendant of
previous resolutions was carried out pursuant to a power of self-redress
available to the Defendant, as an Italian public body, under Article 21 of
Law 241/1990. Article 21-octies of Law 241/1990 provides:
“1. Any administrative provision that is adopted in breach of a law or that
is vitiated on the grounds of ultra vires or a lack of competence may be
declared void.”
Article 21-nonies of Law 241/1990 provides:
“1. An administrative measure, that is illegitimate pursuant to article 21-
octies, may be cancelled officially, if the public interest reasons apply,
within a reasonable period of time and taking the interests of both the
intended recipients and any opposed parties into account, by the authority
that issued it or by another authority indicated by law.”
The first two pages of the Executive Decision rehearsed various matters.
On the second page, reference was made to certain analyses of the Swap
Contracts which, it was said, highlighted (alleged) breaches of certain
laws, namely (1) Article 41 of Law 448/2001, on the basis that the Swap
Contracts did not have an initial value equal to zero, and (2) article 3 of
the Ministerial Circular dated 27 May 2004, on the basis that the value of
the cap was lower than the value of the floor.
23.The Executive Decision continued:
“That the above mentioned breaches were due to the so called implicit
costs of the stipulated swap, and, as such, could not be calculated by
the Province of Pisa, unless they had been disclosed by the banks which
proposed the derivative;
That, moreover, if the Province of Pisa had had full information about the
interest rate swap operation, the decision regarding whom to award the
operation to would have been different to that made with the information
provided.”
Paragraph 5 of the Executive Decision stated that in order to oppose
the Decision, it was possible to file an administrative appeal with the
Defendant within 30 days of the publication date, or to file a jurisdictional
appeal with the Regional Administrative Court of Tuscany within 60
days of the publication date, or to file an extraordinary appeal with the
President of the Republic, on grounds of legitimacy only, within 120 days.
On 30 June 2009 and 2 July 2009 respectively, Depfa and Dexia served
notices on the Defendant in respect of its failure to pay the amounts due
under the Swap Contracts on 28 June 2009.
By a further Resolution dated 15 July 2009, the Province Council resolved
(among other things) to cancel its resolution dated 23 January 2007
insofar as it related to the Swap Contracts. Like the Executive Decision
taken on 29 June 2009, this Resolution was also purportedly taken under
the power of self-redress under Article 21 of Law 241/1990.
The Province Council noted by its first resolution taken on 15 July
that violations of Article 41 of Law 448 of 2001 and of Article 3 of the
Ministerial Circular dated 27 May 2004 had occurred. By its second
resolution, the Province Council noted that “the violations indicated above
are due to the implicit costs of the operation, which cannot be calculated
by the Province of Pisa unless they are indicated by the banks proposing
the operation....”
On 23 September 2009, the Claim Forms were amended to include money
claims (amendments were also made to the declarations sought). The
Claim Forms were subsequently served out of the jurisdiction on the
Defendant on 30 October 2009.
On 29 September 2009, the Province Council further resolved to revoke
its resolution dated 7 June 2007. The Province Council noted by its
first resolution that the procedure for identifying the debt restructuring
operation contained breaches of Article 41 of Law 448/2001 and of Article
3 of the Ministerial Circular dated 27 May 2004, and that these breaches
were due to the implicit costs in the transaction “which could not be
calculated by the Province of Pisa unless they were declared by the banks
proposing the transaction...”.
Meanwhile, on 12 October 2009, the Claimants commenced proceedings
against the Defendant in the Administrative Court for the Region of
Tuscany (“the Italian Administrative Proceedings”) challenging the
Executive Decision taken by Ms Fioravanti on 29 June 2009. The
Claimants' evidence is that they had little option but to commence
proceedings in the Administrative Court for the Region of Tuscany,
because if they had not done so, the Executive Decision would have
become unchallengeable, and there would have been a risk that a civil
judge would have had to assume (at least under Italian law) that the
initial decisions to enter into the Swap Contracts had been legitimately
revoked.
In the Italian Administrative Proceedings the Claimants seek to annul the
Executive Decision of 29 June 2009 and the Resolution of the Province
Committee dated 15 July 2009. Secondly, they seek damages “suffered
and likely to be suffered by the [Claimants] due to the illegality of the
challenged orders.”
The Claimants' evidence is that this is not a claim for damages for
breach of the Swap Contracts. The Claimants' position in the Italian
Administrative Proceedings is that the Administrative Court has no
jurisdiction over the Swap Contracts, because the English courts have
exclusive jurisdiction.
The alleged violations of law involved in the Defendant's decisions to enter
the Swaps
The Defendant contends that its decisions to enter into the Swap
Contracts were invalid because they violated prohibitions imposed by
Italian public law (namely Article 41 of the Financial Law 448/2001 and
Article 3 of the Ministerial Decree 389/2003) with the result that the
Defendant acted outside its capacity and/or in excess of its powers.
As to Article 41 of the Financial Law 448/2001, the Defendant's case can
be summarized as follows:
(1) Pursuant to Art 41.2 arrangements to restructure debt can only be
entered into by Italian local public bodies if the arrangements satisfy the
condition at the end of Art 41.2. This condition is referred to in Italian law
as the requirement for “economic convenience”.
(2) The Art 41.2 requirement for “economic convenience” constitutes a
substantive limitation on the power of Italian local public bodies to enter
into debt restructurings in circumstances engaged by Art 41.2. They have
no power to enter into such arrangements unless there is “economic
convenience” at the time of entry.
(3) In 2007, when the decisions to restructure the debt were taken by
the Defendant, it considered the requirement for “economic convenience”.
It concluded in its decision of 23 January 2007 that the restructuring
(including the Swap Contracts) would result in a saving (i.e. a reduction
in the total liability) of approximately EUR 530.000. In fact, and subject
to the points made below, it contends that by July 2007 the reduction in
liability would have been slightly lower at EUR 409.999.
(4) In 2009, however, the Defendant had the Swap Contracts
professionally analysed as at their date of entry. Contrary to the saving
which the Defendant says that in 2007 it understood the restructuring
would generate, the professional analysis in 2009 established that, as
at the date of their entry, the Depfa Swap had a negative value to the
Defendant of EUR 741.502 and the Dexia Swap had a negative value
to the Defendant of EUR 644.355. The combined negative value to the
Defendant as at the date of entry was EUR 1,385.857. The existence
of these negative values was unknown by the Defendant and not taken
account of in its assessment of “economic convenience” at the time.
(5) Accordingly, as at the date of entry, the Swap Contracts represented
and generated an increase, rather than a saving, in the Defendant's
total liabilities. The negative values of the Swap Contracts exceeded and
extinguished the savings which had been calculated. And, as a result,
the requirement for “economic convenience” under Article 41.2 was not
satisfied.
(6) Because there was no “economic convenience”, Pisa's decision to
enter into the Swap Contracts was as a matter of Italian law unlawful and
contrary to the limitation on its substantive powers contained in Art 41.2.
As to Article 3 of the Ministerial Decree 389/2003, the Defendant's case
can be summarized as follows:
(1) Ministerial Decree 389/2003 sets out rules for the Italian local public
bodies on access by them to the capital markets. The decree was made
pursuant to the power in Art 41.1 of the Financial Law 448/2001 to lay
down rules, inter alia, for the way derivatives could be used by such local
public bodies.
(2) Ministerial Decree 389/2003 has been the subject of explanation
by a Ministerial Circular dated 27 May 2004. As a matter of Italian
statutory construction, the Ministerial Circular dated 27 May 2004 is of
very persuasive authority.
(3) The rules in Ministerial Decree 389/2003 (as explained in the
Ministerial Circular dated 27 May 2004) constitute further limitations on
the substantive powers of local public bodies to enter into derivatives.
In particular, a local public body was only permitted to enter interest
rate swaps 'selling' a floor if and to the extent that such a sale financed
the 'purchase' of a cap. The local public body had no power to enter into
an interest rate swap selling a floor which had a greater value to the
counterparty than the cap which was being purchased had to the local
public body.
(4) The relevant extract from Article 3 of Ministerial Decree 389/2003
provides:
“2. In addition to the transactions mentioned in paragraph 1 of this
article…the following derivative transactions are also allowed:
d) purchases of interest rate “collars” in which the buyer is guaranteed
that the interest rate charged to them will oscillate between a pre-
established minimum and a pre-established maximum”.
(5) The relevant extract from Ministerial Circular dated 27 May 2004
provides:
“The acquisition of the collar also implies the acquisition of a cap and the
contextual sale of a floor, permitted solely for the purpose of financing the
protection against rising interest rates provided by the purchase of the
cap.”
(6) The Defendant contends that it follows from the negative values
inherent in the Dexia and Depfa Swap Contracts at the time they were
entered into that the floor sold by the Defendant was more valuable
to Dexia and Depfa than the cap which was being purchased by the
Defendant was to it. There was no equilibrium or balance. Accordingly, the
Swap Contracts infringed the prohibition on 'selling' a floor other than to
purchase a 'cap'.
(7) Because of that, the Defendant's decision to enter into the Swap
Contracts was unlawful as a matter of Italian law and contrary to the
limitation on its substantive powers contained in Article 3 of the Ministerial
Decree 389/2003.
The Claimants contend that the Defendant's allegations of violations of
law are without substance.
So far as Article 41.2 of Law 448/2001 is concerned, the Claimants
contend that derivatives do not constitute indebtedness and therefore do
not fall to be taken into consideration under the 'economic convenience'
test. This is said to be made clear by, among other things, a Ministerial
Circular of 22 June 2007 which, after referring both to Article 41.2 of
Law 448/2001 and to Ministerial Decree 389/2003, states in terms
that derivatives are not classifiable as borrowing but rather as debt
management instruments. To similar effect is Ministerial Circular
389/2003. The Defendant's Italian law expert, Mr Vulcano, accepts that
Ministerial Circulars are “always of very persuasive authority”.
The Claimants further contend that the Swap Contracts were entered
into after the Bond and cannot be regarded as intrinsic to it. The point
is most clearly illustrated by the fact that the Defendant has regarded
itself as able to revoke the decisions to enter into the Swap Contracts
without revoking the decisions to enter into the Bond. If, as the Defendant
contends, the derivatives were central to the Bond, the Claimants submit
that it is very difficult to see how, on the facts now alleged by the
Defendant, it would not be incumbent upon the Defendant to revoke its
decisions to enter into the Bond given that, on its case, the economic
equivalence test in relation to that entire transaction was not satisfied.
As for Article 3 of Ministerial Decree 389/2003, the Claimants submit that
the same points arise under the Ministerial Circulars. Furthermore, the
wording of the Decree does not require a numerical equivalence between
the values of the cap and the floor. The rationale behind the relevant part
of the Decree is to ensure that entities do not sell floors unless they are
purchasing a cap.
I have set out the parties' cases on the alleged violations of law in some
detail in order to make clear the nature and ambit of the dispute between
them as to the alleged invalidity of the decisions of the Defendant.
Notwithstanding the Claimants' case that the allegations made are flimsy,
they recognise that the Defendant's evidence makes out a good arguable
case on the issue.
The central question:
Does the Italian Court have exclusive jurisdiction over these Claims by
virtue of Article 22(2) of the Brussels I Regulation?
Article 22(2) of the Brussels I Regulation provides as follows:
“The following courts shall have exclusive jurisdiction regardless of
domicile: …2. in proceedings which have as their object the validity of
the constitution, the nullity or the dissolution of companies or other legal
persons or associations of natural or legal persons, or of the validity of
the decisions of their organs, the courts of the Member State in which the
company, legal person or association has its seat”.
42.The words “in proceedings which have as their object” are to be
construed as “in proceedings which are principally concerned with” as
made clear in the recent Court of Appeal decision in BVG v. JP Morgan
[2010] EWCA Civ 390 at [83]. Such a construction brings Article 22(2)
into line with Article 25 of the Judgments Regulation, which provides that:
“Where a court of a Member State is seised of a claim which is principally
concerned with a matter over which the courts of another Member State
have exclusive jurisdiction by virtue of Article 22, it shall declare of its
own motion that it has no jurisdiction.”
The Court of Appeal's analysis of Art 22(2) in BVG v. JP Morgan
(particularly [21], [35 – 37], [83] – [90] and [99] – [106]) supports the
following approach:
(1) Because Article 22 is one of the Articles on jurisdiction which creates
an exception to the general rule of jurisdiction set out in the Regulation it
must not be given an interpretation that is broader than is required by its
objective [35].
(2) The objective of Article 22 is, in the interests of the sound
administration of justice, to ensure that jurisdiction rests with the courts
which are closely linked, in fact and law, with the proceedings and to
avoid conflicting decisions being given as regards the existence of a
relevant entity or as regards the validity of the decisions of its organs [36,
37].
(3) In considering whether or not Article 22(2) issues are raised the Court
must consider the nature of both the claim and any defences [21];
(4) For Article 22(2) to be engaged, the question is whether or not the
action is “principally concerned” with an Article 22(2) issue or issues – see
[83];
(5) What is called for is an exercise in “overall classification” and the
making of an “overall judgment” [86]. This involves a consideration of
whether it is clear that granting jurisdiction to the courts of the relevant
state will result in the sound administration of justice, which is only likely
to be the case if the proceedings are so closely connected with matters
of internal decision making by the relevant entity that they should not
be tried anywhere but in the Courts of the state of its seat [86]. The
Defendant accepted that this Court is bound by the Court of Appeal's
approach to Article 22(2) but reserved its position if this matter goes
further.
The Claimants submit that five issues arise in relation to Article 22(2):
(1) First, when considering whether Article 22(2) applies, should the
Court consider only the nature and scope of the claim, or should it also
have regard to the Defendant's intended defence?
(2) Secondly, does Article 22(2) apply to a public law body such as
the Defendant, where an issue is raised before a civil court as to the
effectiveness of a resolution or resolutions of the Defendant?
(3) Thirdly, is Article 22(2) concerned only with internal disputes within
the company or entity?
(4) Fourthly, does the violation of law issue raised by the Defendant fall
within Article 22(2)?
(5) Fifthly, are these proceedings principally concerned with matters
falling within Article 22(2)?
The first and third issues
The first and third issues were raised by JPMorgan in JPMorgan v. BVG
and were rejected by the Court of Appeal. The Claimants accept that this
Court is bound by the Court of Appeal on these issues, but reserve their
position if this matter goes further.
The fourth issue: does the issue raised by the Defendant fall within Article
22(2)
In defence to the Claimants' claim for enforcement of the Swap Contracts
the Defendant contends as follows:
(1) The decisions to enter into the Swap Contracts were invalid because
made in breach of Article 41.2 of Financial Law 448/2001 and/or of Article
3 of Ministerial Decree 389/2003;
(2) In the light of those breaches the relevant decision making resolutions
were properly cancelled pursuant to Article 21-octies and nonies;
(3) In the light of (1) and/or (2) as a matter of Italian law the Defendant
did not have capacity to conclude the Swap Contracts;
(4) In any event, in the light of (1) and/or (2) the entering into the Swap
Contracts was outside the powers of the Defendant and therefore ultra
vires.
It is clear that at least (1) and (2) involve an issue as to the validity of the
decision made by an organ of the Defendant. The Claimants submit that
this is not so because, even if those decisions were invalid, the Defendant
has no arguable case that this would affect the capacity of the Defendant
to enter into the Swap Contracts or that in doing so the Defendant was
acting ultra vires. They accordingly submit that there is no real issue as to
the validity of the decisions made.
The Claimants rely on Mr Danusso's evidence that
(1) Local authorities have full capacity to manage their assets pursuant
to Article 114 of the Italian Constitution, and have full general capacity to
enter into swaps;
(2) Article 41.2 of Law 448/2001 and Article 3 of Ministerial Decree
389/2003 stipulate certain characteristics that contracts entered into
by public authorities should have. Violation of these stipulations does
not give rise to capacity issues, but instead potentially goes to the
enforceability of the contracts.
The Claimants further submit that persuasive evidence of whether the
alleged violations of law go to capacity or enforceability is provided by
the contemporaneous documents, namely the Defendant's letter to
the Claimant dated 5 June 2009, and the 2009 Executive Decision and
Province Council Resolutions, since they are based on allegations of
breaches of the law rather than of ultra vires.
Mr Vulcano disagrees with Mr Danusso. His evidence is that Italian public
bodies have capacity to act but only according to the laws and usages
recognised by Italian public law; Financial Law 448/2001 and Ministerial
Decree 389/2003 restrict the capacity of Italian public bodies to enter into
contracts, and that cancelling a resolution to execute a contract deprives
public body of any capacity it might otherwise have to enter into the
contract and renders the contract invalid ex tunc.
It is clear that there are significant differences between the Italian law
experts as to whether the capacity of the Defendant to contract would
be affected by the alleged violations of law involved in the Defendant's
decision to enter into the Swap Contracts and/or the purported annulment
of those resolutions. I accept that the Defendant has a good arguable
case of lack of capacity for the reasons set out in paragraphs 34 to 36
of Mr Vulcano's second witness statement. The non-binding decisions of
the Marsala Court of Accounts and the Tribunal of Bologna upon which
the Claimants placed particular reliance rely do not compel a contrary
conclusion. Further, neither of them address the effect of an annulment
decision under Article 21-octies and nonies. In any event, I accept
that the Defendant has a good arguable case of ultra vires based on it
exceeding its powers – see, by analogy, Haugesund Kommune v. Depra
ACS Bank [2009] EWHC 2227.
The fifth issue: are these proceedings principally concerned with an Article
22(2) issue?
There is an obvious difficulty in identifying, at this early stage of the
proceedings, that with which the proceedings are principally concerned.
As Mance J said in Grupo Torras SA v. Al-Sabah [1995] 1 Lloyd's Rep 374,
404:
“The very early stage at which the proceedings have, necessarily, to be
classified for the purposes of art. [22] involves another problem. There is,
obviously, some risk that parties will seek to shape the Court's view of the
proceedings for jurisdictional purposes by, consciously or unconsciously,
displaying part of their hand and underplaying other elements. In the
present case the plaintiffs have had to disclose very fully the nature
and basis of their case in their points of claim as well as in the affidavit
evidence filed on the application for leave to serve out of the jurisdiction.
But there have been no pleadings from the defendants, although there
are various statements on affidavit and documents from which indications
of their attitudes on certain aspects may be gathered...”
The Claimants accordingly submit and I accept that, on applications of the
sort being made here, the Court should be alive to the risk of applicants
displaying only part of their hand in order to wrest jurisdiction away from
the contractually chosen forum in favour of their home court.
The Court's task is to assess as best it can on the material before it
whether the proceedings are likely to be “principally concerned” with an
Article 22(2) issue.
The Defendant submits that the proceedings are “principally concerned”
with the validity of its decisions. The Claimants seek to enforce the Swap
Contracts. The defence to the actions is that the decisions to enter the
Swap Contracts were outside the Defendant's capacity and/or in excess
of its powers. Those are essentially two sides of the same coin. The meat
of the proceedings would be the defence. If the defence succeeded, the
claims would necessarily fail without further factual enquiry. Conversely,
if the defence failed, the Claimants would be entitled to the relief claimed
again without further factual enquiry.
I accept that the validity of the Defendant's decisions is an issue and
indeed an important issue in the proceedings. However, even on the
Defendant's stated case, there are further issues which arise which
strictly speaking do not involve an issue as to the validity of its decisions,
but rather its capacity or power to enter into the Swap Contracts if the
decision to do so was invalid and the legal consequences of any such
lack of capacity or power (Issues (3) and (4) referred to in paragraph 46
above).
More importantly the Claimants submit that there is evidence that the
Defendant's ultra vires defence will not be the only defence put forward in
defence to the Claimant's claim. In particular:
(1) in its initial letter dated 5 June 2009 the Defendant asserted that:
(i) the Claimants had not declared or indicated (ie. disclosed) that the
Swap Contracts had an implicit cost;
(ii) the Swap Contracts were null and void due to the absence of a valid
framework contract;
(iii) the Claimants were in breach of a number of regulations which may
have contributed to causing a major loss to the Defendant.
(iv) In addition, the Defendant was at pains to “reserve every right” in
relation to the Swap Contracts.
(2) The width of the allegations made or hinted at in the Defendant's
letter, including as to non-disclosure and (it appears) mis-selling, is to be
contrasted with the assertion made in the Defendant's skeleton that “the
defence” to the present claims is lack of capacity/power.
(3) In the Executive Decision of 29 June 2009, the Defendant again
hinted at misrepresentation or mis-selling (see paragraph 23 above). The
subsequent decisions of the Province Council dated 15 July 2009 and 29
September 2009 are to similar effect (see paragraphs 27 and 29 above).
(4) Non-disclosure by the Claimants is also referred to by Mr Smith
and by Mr Vulcano in their statements, and the Defendant's evidence
conspicuously allows room for other defences to be advanced.
I accept the Claimants' case that it is likely that there will be issues
raised by way of defence other than lack of capacity/power. The factual
complaint underlying the case on lack of capacity appears to be that the
Claimants concealed from the Defendant the “implicit cost” of the Swap
Contracts and failed to ensure that it was adequately informed so as to be
able to make an informed assessment for itself.
Mr Palagi's letter refers to the fact that “the Banks did not declare or ever
indicate…that the swap was supposed to have a cost”. On the contrary,
he complains that the benefit analysis attached to the amortisation plan
showed a significant economic benefit. He further complains that the
Claimants failed to provide documents with the consequence that the
“customer is not made aware of the implications, costs and conflicts
of interest deriving from the purchase of a financial product”. He also
complains of the Claimants failure to comply with their “duties of
diligence, propriety and transparency in the customers' interest and for
market integrity, obligation to acquire all necessary information from
customers and to operate in a manner so that they are always adequately
informed.”
The Defendant says that this was an early document written without the
benefit of input from English lawyers. However, similar points are made in
the evidence of Mr Vulcano, their Italian lawyer. At paragraph 43.7 of his
second witness statement he states:
“The Commission mentioned at paragraph 83 of Mr Danusso's witness
statement did not have the instruments to evaluate the existence and
the amount of the “implicit costs” of the swap contracts, while the Banks
would have known those costs very well and failed to disclose them to
the Defendant…. It is the existence of those implicit costs, unknown to
the Defendant at the time of the resolutions to enter into Swap Contracts,
that completely reset and eliminated the “economic convenience” of the
operation….”
The Defendant also says, on instructions, that, as presently advised, it
has no intention to advance a defence beyond one of lack of capacity/
power, but that no undertaking can be given that no further defences
will be advanced. It may be, for example, that matters may emerge on
disclosure which support further defences. However, as the Claimants
point out, this has not been stated in evidence, nor has Mr Palagi sought
to withdraw or qualify any of the assertions made in his letter.
On the basis of the material before the court, looking at the case overall
I am satisfied that it is likely that there will be issues raised by way of
defence involving misrepresentation/non-disclosure and failure to advise/
mis-selling. The factual basis of the lack of capacity/power case makes
it likely that this will be so, as do the various documents and statements
made to date on the Defendant's behalf.
I also consider that the trial is likely to entail an investigation of matters
such as (1) which matters were disclosed to or discussed with the
Defendant by the Claimants; (2) what analysis was carried out by the
Defendant (including by the Technical Commission) in relation to the Swap
Contracts and what conclusions were drawn by the Defendant about the
economic terms of those contracts; and (3) whether the Defendant would,
as it has asserted, have acted differently if further information had been
provided by the Claimants. In considering these matters it will not be
possible to isolate the ultra vires issue from the other likely defences.
In all the circumstances, I consider that the proceedings are not likely
to be “principally concerned” with the validity of the decisions of the
Defendant. That will be an important issue, although not in itself decisive
issue because of the further issues of capacity/power/legality. Given
in particular that the invalidity issue is not likely to be the only ground
upon which the enforceability of the Swap Contracts is challenged, I
accept that, as in the JP Morgan v. BVG case, as a matter of “overall
classification” these proceedings are “principally concerned” with the
validity of the Swap Contracts and whether the Claimants can enforce
their rights under them.
Nor do I consider that this is a case which in the making of an “overall
judgment” it is clear that granting jurisdiction to the courts of Italy will
result in the sound administration of justice. In particular, this is not a
case in which the proceedings are so closely connected with matters of
internal decision making by the Defendant entity that they should not
be tried anywhere but in the courts of Italy. There will be no inquiry in
the present case into the internal decision making procedures of the
Defendant. The real battleground on the violation of law issue will be
whether the laws apply to derivatives at all and, if so, whether there
was a violation and, if so, whether the Swap Contracts are or are not
enforceable.
The Defendant submits that granting jurisdiction to the courts of Italy will
result in the sound administration of justice because that is the best way
of ensuring no possibility of conflicting decisions. They say that one of
the striking features of the dispute is the existence of and continuation
of the Italian Administrative Proceedings. These proceedings involve
“an administrative matter” not falling within Article 1 of the Judgments
Regulation. They submit that this has the following consequences relevant
for the interests of sound administration:
(1) The Italian Administrative Proceedings will continue whatever the
outcome of the Defendant's jurisdiction challenge here and will decide
the key issues which would be litigated in the English proceedings. There
is, therefore, an obvious risk of inconsistent judgments if both sets of
proceedings were to proceed.
(2) Two sets of closely overlapping proceedings in different jurisdictions
would be duplicative and wasteful of cost and the parties' and the courts'
time.
(3) Italy is the best place in which the overlapping issues should be
decided – they turn on the decision-making and powers of an Italian
public body and on substantive limitations imposed by Italian legislation.
(4) The dismissal of the English proceedings will, in fact, enable the key
issues to be dealt with in the one jurisdiction which is clearly best-placed
to resolve those issues (i.e. Italy).
(5) That is the best way the English court can secure the important
aim of the Judgments Regulation of preventing the risk of inconsistent
judgments.
I do not accept that declining jurisdiction will avoid the risk of inconsistent
judgments. Regardless of whether the Swap Contracts claims are brought
in England or before the civil court in Italy, the Italian Administrative
Proceedings will continue. The evidence establishes that under Italian law,
at the material time for these proceedings, there is generally a “two track”
approach. The Administrative Court jurisdiction only covers resolutions
leading to the making of a contract but does not extend to its validity and
its performance, which are issues under the exclusive jurisdiction of the
Civil Court. As Mr Vulcano acknowledged in his second statement:
“By decision 9/2008 of the Italian Supreme Administrative Court
(Consiglio di Stato Adunanza Plenaria),…the jurisdiction of each court,
with regards to the contractual activities of Public Administrations, was
clarified. It was held that issues relating to the lawfulness of decisions
prior to a Public Administration entering into a contract were the exclusive
jurisdiction of the Administrative Court and issues concerning the contract
thereafter were the exclusive jurisdiction of the Civil Courts. This 'two
track' system required an administrative body whose decision to enter
into a contract had been unlawful and, as a result, annulled by the
Administrative Court then to appear before the Civil Court to have the
contract annulled.”
Mr Danusso's evidence was to the following effect:
“The Civil Court is not obliged to declare a contract ineffective as a
consequence of the annulment of the decision to enter into such contract.
This would also be the case in the event that the annulment of the
decision to enter into the contract is upheld by the Administrative Court.
Indeed, on the contrary (as further discussed below), a Civil Court is
entitled to disregard an administrative act, including this Executive
Decision, if it believes that such administrative act is unlawful and
indirectly violates the contractual rights of the counterparty.
There is clear case law in Italy which states that civil proceedings
concerning rights arising under a contract must not be suspended if at the
same time there are administrative proceedings pending in relation to an
administrative act which is antecedent to the contract itself. The reason
for this is that the administrative proceedings simply concern the public's
legitimate interest (interessi legitimi) that the public administration
performs correctly its public functions, while the civil proceedings deal
with the individual rights of the contractual counterparty (see Supreme
Court Decision no. 3252/2003).
The consequences of this principle is that a civil court is allowed to
disregard in its proceedings an administrative act if it believes that such
act is unlawful. While the administrative court can annul an administrative
act with an erga omnes effect via judgment, the civil court may disregard
the same administrative act for the purpose of protecting the rights of
the counterparty in that specific case (see Supreme Court Decisions nos.
3252/2003 and 6801/2002).”
This was disputed by Mr Vulcano, who considered that the Civil Court
would take the Administrative Court's decision as its “starting point” and
would, in his experience, stay its proceedings pending that decision.
Even if that be so, it seems clear on the evidence that even if this court
declines jurisdiction in favour of the Italian courts, there will be two sets
of proceedings there and a risk of irreconcilable judgments between them.
For all these reasons, I do not consider that the sound administration of
justice demands, necessitates or requires trial in the courts of Italy.
The second issue: applicability of Article 22(2) to a public law body
JP Morgan accepted in the JP Morgan v. BVG case that Article 22(2)
applies to decisions of public bodies (see the judgment of Aikens LJ at
[15]). No such concession is made by the Claimants in this case.
The question whether Article 22(2) has any application to decisions of
public bodies has been referred to the ECJ by the Berlin Kammergericht in
the JPMorgan v. BVG litigation: see the judgment of Aikens LJ at [14].
In those circumstances I consider that I should not decide the issue
unless it is necessary to do so, which it is not in the light of my conclusion
on the fifth issue.
Conclusion
For the reasons set out above I conclude that the Defendant has not
established that the courts of Italy have exclusive jurisdiction pursuant to
Article 22(2) and its applications are accordingly dismissed.