In December 2023, the England & Wales Court of Appeal unanimously overturned the high-profile ruling handed down by the Commercial Court in October 2022 in the case of Banca Intesa Sanpaolo and Dexia v Comune di Venezia1. In its judgment, the Court of Appeal reversed the Commercial Court's finding that English law governed swaps under the 1992 ISDA Master Agreement entered into shortly before the financial crisis of 2007-2008 were void for lack of capacity, and instead found that the swaps were valid and binding in accordance with their terms.

This decision follows a series of cases in the Italian and English courts in recent years arising out of swaps entered into by Italian public bodies who have sought to challenge the validity of the swaps following the financial crisis; in particular, since the case of Banca Nazionale del Lavoro SpA v Comune di Cattolica, where the Italian Supreme Court held that certain interest rate swaps entered into by Italian local authorities were unenforceable as a matter of Italian law because the local authorities had no corporate capacity to enter into them.

The Court of Appeal's decision has already been cited with approval in another case before the English courts2, finding in favour of the banks and holding that the swaps are in fact valid and binding in accordance with their terms, notwithstanding Cattolica. The Court of Appeal's judgment also clarified the approach that the courts, and appeal courts, should take in relation to issues of foreign law.

Factual background

In 2007, the appellant Italian banks (the "Banks") entered into interest rate swaps with the municipality of Venice ("Venice"), as part of a restructuring of the municipality's debts (the "Swaps"). The Swaps were in fact a novation of similar hedging arrangements that Venice had had in place with Bear Stearns (the "Original Swap").

The 2007-2008 financial crisis significantly impacted the amounts payable under the Swaps and the Swaps subsequently became the subject of disputes.

In August 2019, the Banks commenced proceedings in the English Commercial Court, seeking declarations that the Swaps were valid and binding, and alternative relief in contract and tort.

Significantly, in 2020, the Italian Supreme Court in the case of Banca Nazionale del Lavora SpA v Comune di Cattolica ("Cattolica") held that for the purposes of 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 Article 119(6) of the Italian Constitution, which permitted indebtedness "only as a means of funding investments" thus precluding indebtedness for speculative purposes.

Venice argued that the Swaps were void, on the basis that (among other things), under Cattolica, it had not had capacity to enter into the Swaps in 2007. Venice also sought restitution of sums paid under the Swaps.

Commercial Court decision

At first instance Foxton J, applying Cattolica, held that the Swaps were void on the basis that the Swaps were speculative and involved recourse to indebtedness in breach of the Italian Constitution. Venice had indeed lacked the capacity to enter into the Swaps.

Foxton J also found that Venice's counterclaim for restitution of sums paid under the Swaps was not time-barred under the Limitation Act 1980, though this was subject to a defence of change of position to the extent that the Banks had paid out on back-to-back swaps entered into with unrelated counterparties.

Grounds of appeal

The Banks pursued five grounds of appeal, the following three of which were considered in detail by the Court of Appeal.

  • The Judge's finding that the Swaps were speculative under Italian law was wrong ("Ground 1").
  • The Judge was also wrong to find that the novation fees paid to Bear Stearns by the Banks had constituted an "upfront payment" of the kind that the Cattolica decision would consider as "recourse to indebtedness" within the meaning of Article 119(6) of Italian Constitution. The payments were not any form of compensation provided by the Banks to Venice but instead reflected the cost of buying out the existing rights of the transferor, Bear Stearns, under the novations. These had been a necessary part of unwinding the Original Swap ("Ground 2").
  • Even if the Swaps were void, the judge was wrong to hold that s.32(1) of the Limitation Act 1980 (covering an action for relief from the consequences of a mistake where the mistake could not have been reasonably discovered at the time) applied so as to mean that Venice's claims in restitution were not time barred ("Ground 3").

Venice pursued two grounds of appeal:

  • The Judge was wrong to find that Venice's counterclaim for restitution was governed by English rather than Italian law.
  • The Judge was wrong to find that a change of position defence was available in the circumstances.

Court of Appeal Decision

Allowing the Banks' appeal on Grounds 1 and 2 above, the Court of Appeal unanimously overturned the Commercial Court's finding that the Swaps were impermissible under Italian law.

In the Court's leading judgment, Flaux LJ held that Foxton J's judgment had included a number of "errors in principle" in the application of foreign law. In particular, Foxton J's finding that the Swaps were speculative had been based on his own evaluation of what an Italian court would conclude in this regard, rather than on the expert evidence before him. The Court of Appeal accepted the Banks' submission that Venice had not sought to argue at first instance that the Original Swap had not been a hedging transaction and was speculative: the only basis on which Venice had initially argued the Original Swap was invalid was that it had not been approved by the Venice City Council. That argument had been rejected by the Judge at first instance, who was satisfied there had been the necessary authority. In light of this, the Court of Appeal confirmed that it would proceed on the basis that the Original Swap was a valid hedging transaction.

The Court of Appeal allowed the Banks' appeal against the finding that the Swaps were speculative and otherwise contrary to Article 119(6) of the Italian Constitution. The Court of Appeal found that the judge at first instance had misanalysed the Swaps and wrongly concluded that simply rolling over the negative mark-to-market under the Original Swap transformed the Swaps into speculative transactions. In doing so, the Court referred to part of the Cattolica judgment which held that a hedging derivative could only be entered by a local authority if the mark-to-market criteria could be measured effectively, from which it was clear that the Italian Supreme Court was recognising that a hedging derivative can have a negative mark-to-market at inception without becoming speculative.

In respect of Ground 2, the Court did not consider that it could be said that the novation fees somehow became an "upfront payment". In addition, the Court found that even if that had not been the case, the restructuring of the bond was "for the purposes of financing investment expenditure", which rendered any indebtedness permissible under Italian law.

While it was not necessary for the Court to consider the further grounds of appeal given Grounds 1 and 2 were allowed, the Court commented obiter that it would further have allowed the Banks' appeal on Ground 3 on the basis that limitation would have started running prior to the 2020 decision of Cattolica, as an Italian local authority "would have recognised that it had a worthwhile claim" in circumstances where other Italian authorities issued claims in the English Courts from 2010.

Venice's appeal was accordingly dismissed on both grounds, as follows:

  • A claim to recover payments made under a void contract will usually be governed by the law applicable to that contract. Flaux LJ held that there is an "obvious very close and real connection" between the law governing the void contract and the law governing restitution, and therefore the Commercial Court's application of English law rather than Italian law on this point "cannot be faulted".
  • A defence of change of position was in principle available against a claim for recovery of payments under a void contract where payments were subsequently made under separate back-to-back hedging swaps.


Although the Court's findings as to the Swaps' validity in this case are specific to these transactions and their surrounding circumstances, the decision will provide useful guidance to other banks involved in similar existing and future disputes concerning the validity of interest rate swaps entered into by Italian municipalities.

Whilst the Swaps were governed by English law in this instance, it is worth remembering that that does not mean that every legal issue which arises for determination is exclusively a matter of English law. In particular, issues as to the capacity of Venice (as a legal person) to enter into the Swaps are to be determined by reference to a complex combination of both Italian law and English law. Whether a particular provision of Italian, or any other foreign law, restricts a local authority's capacity will depend on the precise nature of the relevant foreign law provision, and be subject to English rules of private international law. Counsel for the Banks in this case successfully argued that the rules identified in Cattolica were mandatory rules of Italian law, but not restrictions on Venice's capacity: they were rules that prohibited Venice from exercising its capacity in a particular way, rather than restricting its capacity outright. Whilst the relevant law for consideration was an Italian law rule, established by Cattolica, it is English law which determined the correct characterisation of the effect of Cattolica on the validity of the Swaps.

The Court of Appeal also confirmed the approach to be taken in the analysis and application of foreign law in the English courts:

  • Findings as to matters of foreign law are findings of fact, and in approaching such issues, the Court must determine what the highest court in the foreign legal system would decide if the point had come before it, and then apply that analysis. In general, expert evidence is important for such a determination, to avoid the analysis becoming merely an English law analysis of foreign law issues.
  • An appeal court will not interfere with a lower court's findings unless they were plainly wrong. However, there is scope for the appeal court to interfere if the lower court's analysis was based on its own application of foreign law to the facts rather than conclusions of foreign law based on the expert evidence. An appeal court will only interfere if the judge has erred as a matter of principle.

Finally, it may be worth noting that, although the issue of a party's capacity to enter into a transaction is, in this context at least, distinct from the issue of sovereign immunity, both of these risk areas may be relevant when negotiating transaction documentation. The ISDA 1992 Master Agreement contains, at paragraph 13(d), a waiver of sovereign immunity which goes some way towards protecting against arguments of sovereign immunity. As for protecting against the risk that a party's capacity to enter into a transaction may come to be in doubt after the transaction is concluded, an appropriate level of due diligence before entering into the transaction, along with a capacity opinion, may represent the best approach.


1. [2023] EWCA Civ 1482

2. Banca Nazionale del Lavoro, Commerzbank and Dexia Credit Local v Provincia di Catanzaro [2023] EWHC 3309 (Comm)

Originally Published 20 February 2024

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