UK: Comfort In Consistency – Dexia Crediop S.P.A. v. Comune Di Prato [2017] And International Use Of The ISDA Master Agreement

Last Updated: 10 July 2017
Article by Alexandra Doucas

The Court of Appeal has reversed a judgment of the Commercial Court which had worrying implications for banks concluding international transactions using standard form ISDA documentation (and, by implication, other standard form documents too). Use of a standard form contractual framework is intended to ensure that parties' obligations are consistently understood (and so far as possible enforced), no matter where the transaction actually happens. The first instance judgment in Dexia Crediop v. Comune di Prato jeopardised this certainty, and it is welcome that it has been successfully appealed.


The dispute between Dexia Crediop S.P.A. (Dexia) and the Italian municipal authority, Comune di Prato (Prato), follows familiar lines. Dexia was appointed as Prato's adviser in relation to debt restructuring and interest rate swaps in 2002. In November 2002, Dexia and Prato entered into an ISDA Master Agreement (1992 version), containing English choice of law and jurisdiction clauses, pursuant to which they entered into six interest rate swap transactions between December 2002 and June 2006. From late 2010, Prato stopped making payments due under the sixth (and only outstanding) swap, and began a process of administrative self-redress in Italy. Dexia started proceedings in England, claiming the sums due to it.

Prato defended the proceedings in the English court on bases including: (a) that the swaps were void as a matter of English law because of Prato's lack of capacity; and (b) Prato was entitled to treat the swaps as null and void, because of breaches by Dexia of mandatory rules of Italian law.

Relevance of Italian law – article 3(3) of the Rome Convention

The issue of Prato's capacity is purely one of Italian law, and we do not consider here the court's rejection of its arguments. The aspect of this case which had considerable practical relevance was the superficially abstract question of the role of article 3(3) of the Rome Convention.1

Parties in the position of Dexia could be forgiven for thinking that the provisions of Italian law in relation to the conclusion of interest rate swaps were irrelevant, because the parties had agreed that English law would apply.

Prato relied, however, on article 3(3) of the Rome Convention, which states that: "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 by contract, hereinafter called "mandatory rules"."

Prato argued that the swap was a purely Italian affair, and that article 3(3) was therefore engaged. It alleged that Dexia had breached a number of requirements of Italian law that were properly characterised as mandatory rules, with the consequence that the swap was voidable by Prato (but not by Dexia).

The judge at first instance agreed, holding (in summary) that: (a) Dexia had been obliged, in circumstances where the swap transactions were not concluded "on-site" (apparently referring to whether the contracts were concluded at Dexia's offices or not), to include a specific contractual provision allowing Prato a seven-day cooling off period; and (b) Dexia had been obliged to include provision for certain specific matters in the contract between the parties. He did not accept that either the use of a globally-accepted, standard form ISDA Master Agreement, or Dexia's use of banks outside Italy in order to hedge its own exposure, amounted to a connection with a country other than Italy. Dexia had therefore been obliged to comply with any mandatory rules of Italian law.

Illustrating the problem

The conclusions reached by the judge were more significant than they might appear. In essence, he determined that "standard form" was not as standard as Dexia thought. In concluding an agreement with Prato, it had been obliged to take into account a number of Italian law requirements that the ISDA framework did not contemplate. If this judgment were correct, there would be both legal and commercial implications.

On the legal side, parties would have to ensure that standard form documents (like ISDA, but not limited to it) were tailored to local law requirements, which might not always be compatible with their existing provisions.

Commercially, the inclusion of mandatory requirements such as a seven-day cooling off period would have implications for a bank's ability to hedge its exposure to its satisfaction. These issues might in turn affect the way in which the bank would price the swap it proposed to enter into.

Banco Santander Totta – the competing view of article 3(3)

Only a short time after the first instance judgment in Prato, the Commercial Court came to a different view in Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA [2016] EWHC 465 (Comm). In that case, the court held that in considering whether all relevant elements related only to one country (other than the one whose governing law has been chosen): (a) it was enough to consider elements pointing away from the purely domestic, and there was no need to establish a connection with another specific jurisdiction (as the judge in Prato had appeared to consider necessary); (b) the use of ISDA documentation was relevant, in that it was likely that it had been chosen in part to promote legal certainty, which would be undermined if different local laws were held to apply; and (c) it was relevant that the transactions were hedged out of Portugal. This decision, while arguably preferable to that in Prato, appeared to conflict with it.

Clear approach now provided by the Court of Appeal

That conflict has now been resolved by the Court of Appeal in two judgments of 2017. The first upheld the decision at first instance in the Banco Santander case. The more recent, in the Prato litigation, applied the same principle to similar effect. The Court of Appeal in Prato was bound to follow the decision on appeal in Banco Santander as to the meaning of article 3(3). Consequently, it held that there was no need to establish a link to a specific jurisdiction other than Italy, provided that there were elements that lent an international flavour and pointed away from Italy.

In this regard, the judgment notes two elements, each of which would be sufficient to break the exclusive connection of the transaction with Italy:

  1. use of the ISDA Master Agreement, in particular its international nature, the fact that the use of the Multicurrency-Cross-Border form contemplates the involvement of more than one country or currency, and the fact that the agreement was signed in English (not the first language of either party); and
  2. back-to-back hedging of the swap by Dexia outside Italy, which was described as "highly significant". The implication is that Dexia was trying to achieve as close a hedge as possible of its exposure to Prato. The Court of Appeal agreed that hedging in this case (as in Banco Santander) was routine. It also noted that the utility of the hedge would be undermined if, for example, different mandatory cooling off periods were held to apply in the jurisdiction where the swap was agreed, and the jurisdiction where the hedge was agreed.


Both judgments by the Court of Appeal should come as a relief to banks routinely using standard form documentation such as that provided by ISDA. They provide some comfort that English courts are likely to take a consistent approach to parties' obligations, irrespective of the jurisdiction in which the transactions actually happen and that, in most cases, parties will not have to build tailored local requirements into the standard forms they use.


1 The relevant contracts were all made between 1 April 1991 and 16 December 2009. The Rome Convention was replaced by Regulation (EC) No 593/2008 (Rome I), applicable to more recent commercial contracts, but Rome I largely replicates the provisions of article 3(3) (see recital (15) and article 3(3) of Rome I).

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