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17 Jan 2024

Venice swaps decision sunk by Court of Appeal (Banca Intesa v Venezia)


The Court of Appeal has allowed an appeal by Banca Intesa Sanpaolo SpA and Dexia Crediop SpA (the "Banks”) and dismissed a cross-appeal by the Comune di Venezia (“Venice”), upholding the validity of interest rate swaps entered into by Venice with the Banks and overturning the High Court decision that they were void because Venice lacked capacity to enter into them under Italian law.

In Banca Intesa Sanpaolo Spa & Anor v Comune Di Venezia [2023] EWCA Civ 1482, the Court of Appeal rejected Venice's arguments and held that the swaps amounted to hedging, not speculation, and did not involve recourse to indebtedness in breach of the Italian Constitution, as the High Court had wrongly held. The swaps were, therefore, valid.

The facts

  • Venice issued a bond in 2002, maturing 2022, bearing a floating EURIBOR-linked rate of interest (the "Bond").
  • Under a 2002 Bear Stearns swap (the "Bear Swap"), Venice would receive the floating EURIBOR-linked rate and would pay a USD-LIBOR-linked floating rate but with a cap and floor (a "collar").
  • In 2007, Venice decided to restructure the Bond, extending its maturity to 2037 and varying its coupon. Since the terms of the Bear Swap were no longer aligned with those of the Bond, the swap was restructured whereby the Bear Swap was novated to the Banks who paid to Bear Stearns a close-out "upfront" of €8 million, reflecting the negative "mark to market" ("MTM") of the Bear Swap to Venice/positive MTM to Bear Stearns.
  • The terms of the new, novated swaps (the "New Swaps") included rolling the negative MTM into the (and thus more expensive) payment terms under the New Swaps. The New Swaps thereby had a significant positive MTM in the Banks' favour/negative MTM for Venice. In addition, the duration and interest rate payable by the Banks was amended to match the restructured Bond.
  • The Banks also entered into back-to-back market-facing swaps with two other banks to hedge the risk of the New Swaps.
  • The New Swaps were under an ISDA Master Agreement and governed by English law.
  • However, it was common ground that issues as to the capacity of Venice (as a legal person) to enter into the New Swaps were to be determined by reference to Italian law.
  • In 2019 the Banks brought proceedings in the English Commercial Court seeking declarations that the New Swaps were valid and binding.
  • In 2020, the Italian Supreme Court issued its decision in Banca Nazionale Del Lavoro v Municipality of Cattolica Decision No 8770/20 ("Cattolica"), holding that, under Italian law in effect until 2013, a local authority did not have capacity to enter into speculative derivatives and that certain types of swaps could constitute indebtedness for the purposes of the constitutional limit on local authority borrowing.
  • Following the decision in Cattolica, Venice counterclaimed in restitution for the sums it had paid to the Banks on the basis that the New Swaps were "speculative" and/or that the New Swaps involved Venice incurring impermissible debt.

Commercial Court decision

The Commercial Court determined that the New Swaps were void and unenforceable.  Foxton J held on the evidence that an Italian court would have found that the restructuring of the Bear Swap into the New Swaps could "fairly be characterised as predominantly speculative", for example because Venice was entering into the New Swaps with the Banks who would themselves make the payment necessary to close out the Bear Swap, and recover the cost of doing so through the terms of the New Swaps; Venice thereby gained the potential opportunity that future interest rate movements could result in paying less than the unwinding MTM cost of the Bear Swap ("the Unwind Cost"), but at the same time Venice ran the risk that interest rate movements during the life of the New Swaps might mean Venice paid more than the Unwind Cost; and Venice relied on the fact that the €8 million paid by the Banks to Bear Stearns under the novations to wind-up the Bear Swap was then "priced in" to the terms of the New Swaps and argued that this was as much an "upfront" as if the payment had been made by the Banks to Venice which had itself paid Bear Stearns to unwind the Bear Swap. Foxton J accepted the argument that the fact that the payment in question moved from the Banks to Bear Stearns rather than through Venice did not change the analysis. The upfront payment rendered the New Swaps a recourse to indebtedness by Venice i.e., Venice was effectively borrowing funds from the Banks by receiving the benefit of the upfront payment, and was not doing so for the permitted purpose of financing investment expenditure, but to meet the Unwind Cost of the Bear Swap.

The court also found that the law applicable to Venice's restitution claim was English law - as the law of the country with the closest and most real connection with the transactions.  Foxton J held that the banks were, in theory, able to rely on a 'change of position' defence in relation to the back-to-back hedging swaps they entered into in connection with the New Swaps. Italian law, on the other hand, does not recognise a 'change of position' defence.

For claims based on a mistake of law, time runs for limitation purposes from when the paying party discovered, or could with reasonable diligence have discovered, their mistake1. Foxton J held that Venice could not have discovered that it had a "worthwhile claim" prior to the Cattolica decision in 2020, and so its restitution claim was not time-barred.

For further discussion of the Commercial Court decision, please see our article here.

Appeal to the Court of Appeal

On appeal, the Banks argued that Foxton J was wrong in holding that the New Swaps were "speculative" under Italian law and in holding that the New Swaps had involved an "upfront payment". As a result, the New Swaps were not void, and Foxton J had wrongly held that the Italian rules on speculation and indebtedness were, in English law, limits on Venice's capacity.

Venice on its cross-appeal argued that Foxton J had been wrong in finding that its restitution claim was governed by English law rather than Italian law and that the Banks could, in principle, rely on a change of position defence to the restitution claim.

Decision on ground 1: Speculative transactions

Usually, the court can only interfere with findings of fact, including findings of foreign law, if they are "plainly wrong". Here, the Judge's analysis relied on his application of Italian law, and so he had erred in principle, leaving room for the Court of Appeal "to interfere". Foxton J’s finding that the New Swaps  were speculative had been based on his own evaluation of lower court decisions and English law cases, rather than on expert evidence and the likely view of the Italian Supreme Court2. The expert evidence had been confined to what the test for speculation was as a matter of Italian law and had not concerned how that test applied to the facts.

Foxton J had made a number of errors of principle. The “root error” was his failure to factor in the point that Bear Swap was hedging and was a valid contract which bound Venice at the time of the Bond being restructured.

This led to a misanalysis on his part of the New Swaps. At the time when Venice restructured the Bond, because of the new terms and extended maturity date, it needed to renegotiate and restructure the Bear Swap to bring it into alignment with the restructured Bond or (if Bear Stearns refused such a restructuring, as was the case) enter into a new swap with another bank or banks which was aligned with the restructured Bond. Had Bear Stearns agreed to restructure the Bear Swap, it would be absurd to suggest that Italian law would have prohibited the restructuring of the Bear Swap. A new Bear Swap aligned to the restructured Bond would have been just as much a hedge as the swap it replaced. However, any restructuring by Bear Stearns would have had to take account of the existing negative MTM; it could not be "wished away". Bear Stearns would have restructured the Bear Swap to correlate with the restructured Bond and rolled over the negative MTM so that, in effect, exactly what happened with the Banks would have happened with Bear Stearns, but it would still have been hedging.

The price paid for the Banks was the novation fee/Unwind Cost, which corresponded with the negative MTM at that time. Because the Bear Swap, as novated to the Banks, was not aligned with the restructured Bond, it had needed to be restructured. The disparity between the cap and the floor under the New Swaps, which had so troubled Foxton J as to lead him to conclude that the New Swaps were speculative, corresponded with the negative MTM under the Bear Swap, which the Banks had closed out by paying the novation fees/Unwind Cost.

Contrary to Foxton J’s conclusion, the negative MTM was an existing exposure of Venice originally to Bear Stearns, now to the Banks, and was not some new exposure or risk. If that existing exposure had remained to Bear Stearns, it would not have somehow converted a valid hedging swap into something speculative when the Bear Swap was restructured. It was difficult to see how, merely because Venice's same exposure or risk was now to the Banks, what would otherwise have been hedging became speculative.

The second and more fundamental error was Foxton J's finding that, in entering the New Swaps with the significant difference between the cap and the floor, Venice was taking on a significant new risk. That was “just wrong”. The difference constituted the rolling over of the negative MTM to which Venice was already exposed under the Bear Swap. Since that exposure did not render what was a valid hedging swap speculative, it was difficult to see how rolling over of the exposure into the New Swaps could render them speculative. In any event, the existence of an initial negative MTM in the New Swaps did not in itself amount to speculation, as the Cattolica decision itself recognised.

If Foxton J had focused on the right question and taken account of the fact that the Bear Swap was a hedge which was a valid contract, he would have concluded that the Italian Supreme Court would have concluded that the New Swaps were also hedging. They gave Venice the benefit of an extended maturity period and other terms to correlate with the restructured Bond, without altering the economic effect of the Bear Swap. On the basis that the Bear Swap was hedging, there was no logical or legal reason to conclude that the New Swaps were anything other than hedging.

Decision on ground 2: Upfront payment

Foxton J's analysis of whether the novation fees constituted an upfront payment to Venice was his own application of Cattolica's definition of an upfront payment to the facts, once again making his conclusion more amenable to review on appeal.

It was agreed between the Italian law experts that an upfront payment in the context of derivatives is an amount of money paid by one party to another to rebalance the financial situation of the parties in "non-par swaps" i.e., swaps whose value at inception is not equal to zero. On the face of it, the payments of novation fees by the Banks to Bear Stearns did not fall within that definition.

Foxton J overlooked the argument that the Bear Swap was valid hedging, under which the negative MTM was an existing exposure which Venice faced. If Bear Stearns had agreed to renegotiate its swap, the Court of Appeal could not see how it could be said that, in rolling over the negative MTM into a restructured swap, Bear Stearns was making an upfront payment. In circumstances where the Banks took over the Bear Swap and paid the novation fees effectively to stand in the shoes of Bear Stearns, it could not be said that the novation fees somehow became an upfront payment.

As to the further question whether Foxton J was right to conclude that the payments were not "for the purposes of financing investment expenditure", Foxton J's  reasoning was “infected by the same errors as he made in relation to Ground 1”. The restructuring of the Bond was clearly for the purposes of financing Venice's investment expenditure and, on that basis, the entering of the New Swaps was hedging and not speculative, as an integral and necessary part of that restructuring, was likewise for those purposes.

The Banks' appeal therefore succeeded and the New Swaps were valid and binding on Venice. Accordingly, the Banks' remaining arguments and Venice's cross-appeal were academic.

Decision on Venice's cross appeal: Restitution claim

  • Relevant law. Foxton J had been right to conclude that the restitution claim was governed by English law. The alleged unjust enrichment had occurred because payments had been made pursuant to an English law contract. In a case such as the present, the applicable law for the restitution claim is English law, since that was the law which governed the transactions.
  • Limitation. Foxton J had erred in concluding that Venice could not, with reasonable diligence, have discovered that it had a worthwhile claim prior to Cattolica. Many Italian authorities had acted earlier than that. Venice did not need to know that its claim would succeed, just that it could plead a proper case, which it could have done in 2010.
  • Change of position defence. The Court of Appeal indicated that there was no public policy reason why a change of position defence should not be available to Banks in response to a claim by a local authority for restitution in respect of payments it had made to those Banks. However, because the New Swaps had been held to be valid, the point had become academic.


This decision should provide more certainty and comfort to Banks who enter into swap transactions with Italian public bodies as more guidance is given on how English courts differentiate hedging from speculative transactions under Italian law, and what does and does not constitute an upfront payment, in determining their validity following the Cattolica decision.

However, it also highlights the potential for the court to overturn findings of foreign law on appeal. As noted above, the court can only interfere with findings of fact, including findings of foreign law, if they are "plainly wrong"3. But insofar as Foxton J's findings stemmed from his application of Italian law to the facts and particularly where they were not based on Italian law expert evidence, "there is more scope for [the Court of Appeal] to interfere". The Court of Appeal caveated that it will be cautious and "only interfere if satisfied that the judge has erred in principle, for example by failing to take into account a material consideration".

The series of recent 'Italian swaps' cases stems from the Italian Supreme Court decision in Cattolica. Here, the Banks had also sought permission to appeal on the grounds that Foxton J's decision to apply the law as stated in Cattolica (in 2020) retrospectively to the transactions (which were entered into in 2007) was wrong because the development of Italian law in Cattolica was not reasonably foreseeable as at the date of the transactions.  The Court of Appeal declined to consider whether the decisions of a foreign highest court should be given retrospective effect by an English court. The Court of Appeal commented that the question was "a difficult, albeit interesting, one on which there is no authority of direct relevance". If the point had been necessary to decide to determine the outcome of the Banks' appeal, the Court of Appeal would have been inclined to grant permission to appeal. But because the Banks succeeded on their primary grounds of appeal, it was not necessary to address this point and anything the court said would have been obiter.



1 s32(1)(c), Limitation Act 1980

2 Which the parties accepted as the correct applicable principle, as stated in Dexia Crediop SpA v Comune di Prato [2015] EWHC 1746 (Comm) at [128].

3 As per Dexia Crediop SpA v Comune di Prato [2017] EWCA Civ 428 at [34]-[42] and Byers v Saudi National Bank [2022] EWCA Civ 43; at [98]-[105], approved by the Privy Council in Perry v Lopag Trust Reg [2023] UKPC 16