English Court of Appeal Confirms Primacy of Choice of Governing Law Clause in ISDA Master Agreements

by Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP

On 15 June 2017 the English Court of Appeal handed down a significant judgment in Dexia Crediop S.p.A. v Comune di Prato. The Court’s unanimous judgment confirmed 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 ISDA Master Agreement in question, contained an English law choice of law clause and a clause conferring jurisdiction on the English courts.  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. This decision builds on the Court of Appeal’s decision in Banco Santander Totta SA v Companhia Carris de Ferro de Lisboa SA leaving only limited scope for such choice of law challenges in the English courts.


In 2002 Dexia Crediop S.p.A. (“Dexia”), an Italian investment bank, and Comune di Prato (“Prato”), an Italian local authority, signed a 1992 ISDA Master Agreement (Multicurrency – Cross Border), the terms of which were incorporated into swap contracts as part of the restructuring of Prato's debt. The ISDA Master Agreement contained a clause, conferring jurisdiction on the English courts to resolve disputes arising out of swaps as between the parties in accordance with English law. In 2006 Prato became liable to pay sums due under one of the swaps and sought assistance from Dexia to restructure that transaction. The subsequent restructuring had the effect of cancelling the existing swaps and Dexia and Prato entered into a new swap which incorporated the ISDA Master Agreement, including the English law and jurisdiction clause. As a result of the 2008 financial crisis, in 2009 Prato was liable to make certain payments to Dexia, of which it made two payments. In December 2010, Prato purported to exercise its rights to administrative self-redress by annulling the resolution to enter the restructured swap and discontinued making payments to Dexia. Subsequently Dexia made a claim in the High Court against Prato for the amount of the unpaid payments.

The High Court decision

At first instance, the High Court held that regardless of whether the parties had chosen English law as the governing law, mandatory provisions of Italian law also applied because Article 3(3) of the Rome Convention[1] was engaged.[2]

Article 3 of the Rome Convention gives primacy to the law chosen by parties to a contract. However, this is qualified by Article 3(3) of the Rome Convention, which provides 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’”.

In finding that Article 3(3) of the Rome Convention applied, Walker J considered that all other elements relevant to the situation were connected with Italy, namely that (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. Walker J further held that neither the use of an ISDA Master Agreement nor the decision to enter into back-to-back swaps with non-Italian counterparties were elements “relevant to the situation” in this case.

The effect of applying Article 3(3) was to give Prato a right to nullify the swap agreements pursuant to Article 30 of the Testo Unico della Finanza (the “TUF”), which Walker J determined was a mandatory rule of Italian law. Article 30 of the TUF invalidates “off-site contracts” (which the High Court found the swaps contracts in question to be) where the contract does not provide the investor with a seven-day right of withdrawal.

The Court of Appeal’s decision

The Court of Appeal overturned the High Court’s decision (the “Dexia v Prato” case) and confirmed the approach of the Court of Appeal in Banco Santander Totta SA v Companhia Carris de Ferro de Lisboa SA & Ors[3] (the “Banco Santander” case).

In the Banco Santander case several Portuguese transport companies (the “defendants”) entered into swap agreements with Banco Santander Totta SA, a subsidiary of Banco Santander. The swaps were governed by ISDA Master Agreements and were subject to English law and jurisdiction. Following the 2008 financial crisis the defendants found themselves in a difficult position under the swap agreements and failed to make their required payments. Banco Santander Totta brought a claim against the defendants seeking to recover the unpaid sums. The defendants argued that pursuant to Article 3(3) of the Rome Convention all the relevant elements were connected with Portugal and therefore mandatory Portuguese rules applied to the swaps. These rules affected capacity to enter into the swaps because they were speculative transactions and “games of chance”; and the swap agreements were liable to be terminated under rules relating to “abnormal change of circumstance”.[4] The Court of Appeal affirmed the decision of the High Court and held that Article 3(3) of the Rome Convention did not displace a contractual choice of English law with any mandatory rules of Portuguese law even where both contracting parties were Portuguese. In the leading judgement, Sir Terence Etherton, MR held that the elements relevant to the situation at the time are “not confined to factors connecting the contract to a particular country in a conflict of laws sense[5] and that the choice of law agreed by the parties could be displaced only pursuant to Article 3(3) where the “the situation is purely domestic.”[6]

In the Dexia v Prato case, the Court of Appeal followed the decision in the Banco Santander case, while underscoring the narrow circumstances in which Article 3(3) will apply. The Court held that (i) the fact that the parties executed the 1992 ISDA Master Agreement (Multicurrency – Cross Border); and (ii) the fact that Dexia hedged its exposure under the swaps with back-to-back transactions with foreign banks were each sufficient, on their own, to constitute an international and “relevant” element, leaving no room for the application of Article 3(3) of the Rome Convention.[7]

The Court of Appeal further held that the presence of back-to-back contracts was “highly significant” because if mandatory local laws are applied to individual swap contracts, there is a “real risk that the back to back security will quickly become illusory”. The Court gave the example of where the law of one country requires a right of withdrawal seven days after execution (as Italian law does), but the law of the other party to a back-to-back contract has a 28-day right of withdrawal. In such a situation, the Court considered that back-to-back contracts easily could “cease to be useful”.[8]

The Court considered the fact that non-Italian banks also had tendered for the original advisory contract with Dexia was also a relevant element because it demonstrated the international market in which the swaps contracts later were concluded.[9]

Looking forward – the primacy of governing law clauses

In confirming the approach adopted in the Banco Santander case, the Dexia v Prato decision has provided much needed certainty regarding the primacy of choice of law agreed by parties to a ISDA Master Agreement. In the words of the Court of Appeal, “[o]nce an international element comes into the picture, Article 3(3) with its reference to mandatory rules should have no application”.[10] In particular, by broadly construing the kind of elements which may be “relevant elements” pursuant to Article 3(3) of the Rome Convention, the decision evidences the English court’s unwillingness to displace the parties’ chosen governing law even in circumstances where both parties are foreign parties and where the contract was formed in a foreign location.


[1] 80/934/EEC: Convention on the law applicable to contractual obligations, opened for signature in Rome on 19 June 1980. The Rome Convention applies to contracts executed between 1 April 1991 and 17 December 2009. The Rome Regulation I (EU Regulation 593/2008) replaced the Rome Convention and applies to contracts executed after 17 December 2009. It contains a provision which is substantially similar to Article 3(3) of the Rome Convention.

[2] Dexia Crediop S.p.A. v Comune di Prato [2015] EWHC 1746 (Comm).

[3]  [2016] EWCA Civ 1267.

[4] At paragraph 10.

[5] At paragraph 43.

[6] At paragraph 57.

[7] See discussion at paragraphs 130-134.

[8] At paragraph 135.

[9] At paragraph 136.

[10] At paragraph 137.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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