UK: English Court Of Appeals Confirms Primacy Of "Choice Of Law Clause" In ISDA Master Agreements

On June 15, 2017, the English Court of Appeal handed down a unanimous judgment in the case of Dexia Crediop v. Comune di Prato [2017] EWCA Civ 428 (the "Dexia v. Prato case"), confirming that the nature of an agreement made pursuant to an ISDA Master Agreement will be sufficiently international in character to prevent the application of any mandatory rules of local law. The decision follows a series of challenges made by several European public authorities in the English courts, arguing that notwithstanding the choice of law adopted by parties to an ISDA Master Agreement, Article 3(3) of the Rome Convention permits the application of mandatory local rules.

In the Dexia v. Prato case,  the Court of Appeal underscored the narrow circumstances in which Article 3(3) will apply. The Court held that Article 3(3) was inapplicable because of two facts that constituted separate international and "relevant" elements: (i) the parties executed the 1992 ISDA Master Agreement (Multicurrency – Cross Border), and (ii) Dexia hedged its exposure under the swaps with back-to-back transactions with foreign banks.

The decision builds on the Court of Appeal's earlier decision in Banco Santander Totta SA v. Companhia Carris de Ferro de Lisboa SA [2016] EWHC 465, leaving only limited scope for such choice of law challenges in the English courts.

As explained in a Cadwalader memorandum addressing the case, the English High Court ruled that the Agreement was subject to Italian law because (i) "the swaps were entered into in Italy by Italian incorporated parties," (ii) "communications between the parties occurred in Italy," (iii) "Dexia was subject to the Italian financial services regime" and (iv) "the obligations under the swaps were to be performed in Italy."

Prato claimed that Article 3(3) of the Rome Convention mandated that the swaps be subjected to Italian Law, but the Court of Appeals rejected this argument and ruled that the fact of the parties' entering into an ISDA Agreement with an English "choice of law" clause was sufficient to discount an exclusive obligation to Italian law. Other factors (such as the "presence of back-to-back contracts") were also significant in holding that local laws should not be applied to the transactions at issue.

The Cadwalader memorandum was authored by Steven Baker, Jenna Rennie and Janaki Tampi.

Commentary / Steven Baker

In restating the position articulated in the Banco Santander Totta case that the choice of law adopted by parties to an ISDA Master Agreement will, in almost every situation, take primacy over any mandatory rules of local law, the Dexia v. Prato decision has provided an important degree of certainty for international parties contracting using the ISDA standard form. Parties who choose English law as the governing law pursuant to an ISDA Master Agreement must be ready to shoulder the weight of English contract law, there being only a very limited ability to shift the weight in favor of domestic local rules.

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