International swaps and restitution – when can parties recover payments made under invalid or null and void swaps?

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International swaps and restitution – when can parties recover payments made under invalid or null and void swaps?

Published 8 diciembre 2016

Dexia Crediop SpA v Commune di Prato

In the latest in a series of disputes arising out of interest rate swap transactions entered into with Italian municipalities, the High Court has confirmed its approach to the question of when restitutionary remedies will be available, and what law should be applied in considering them.


Between 2002 and 2006 Dexia, an Italian bank, entered into six interest rate swap transactions with the Tuscan municipality Commune di Prato. The transactions, which were governed by an ISDA Master Agreement subject to English law and jurisdiction, initially resulted in net payments being made by Dexia. However, after June 2009 Prato became liable to make payments under the terms of the 6th swap. From 31 December 2010 onwards, it failed to do so. Dexia brought proceedings in England to recover approximately €6.5million.

The 2015 judgment

The High Court gave judgment on the main part of the claim in June 2015, finding that despite the English law clause in the ISDA Master Agreement, certain mandatory rules of Italian law must be applied pursuant to Article 3(3) of the Rome Convention. Those rules rendered swap 6 null and void because Dexia had not complied with an Italian law requirement to inform Prato of its entitlement to a 7 day cooling off period.

Our April 2016 Journal article explained that this approach to Article 3(3) was not followed in the subsequent case of Banco Santander Totta SA v Companhia de Carris de Ferro de Lisboa SA & others, in which it was held that Article 3(3) will not apply where international standard documentation (such as the ISDA Master Agreement) is used. These conflicting decisions continue to cause uncertainty about the way Courts will approach this issue.

Following the 2015 judgment, the Court had to consider whether Prato was entitled to restitution of the moneys it had paid under the null and void swap 6, and the parties were asked to make further submissions on this point. In addition, Dexia raised an alternative argument: that it was entitled to restitution in respect of payments it had made under swaps 1, 2, 4 and 5 if those swaps were invalid. Further hearings took place between October 2015 and July 2016 to deal with these additional points.

The 2016 judgment

One of the first questions that the Court considered was which law should be applied to the question of whether Prato was entitled to restitution of swap 6 payments. Unusually, neither the Rome I and Rome II Regulations, nor the Rome Convention were of assistance in deciding this point. Rome I only applies in respect of contracts concluded after 17 December 2009 (which swap 6 was not). Rome II does not apply where the contract in question is null. The Rome Convention does not have the force of law in England. As a result, the judge had to apply common law principles. In doing so, he relied on a 2008 case which confirms that the law with which the obligation to repay moneys "has its closest and most real connection" should be applied. In this case, given the parties involved, that was Italy, regardless of the fact that the ISDA Master Agreement contained an English law clause. The judge acknowledged that this might seem a surprising result, but explained that his view was that where a contract has been found to be void from the outset, no regard should be given to a choice of law clause in the contract itself.

There was no dispute that if Italian law applied, Prato was entitled to restitution in the sum of €1.6m.

Conversely, the Court held that English law applied to Dexia's claim for restitution in relation to swaps 1, 2, 4 and 5, simply because that neither party had pleaded that Italian law should apply or adduced evidence of what the applicable Italian law would be. Prato suggested that it should not be required to give restitution for the sums it had received in relation to these swaps. It said it had believed the swaps were valid when it received the payments and had therefore treated the money as additional revenue, and disbursed it in various ways, so that it would not be equitable to order it to be repaid. The Court did not accept this argument: given the figures involved, it did not consider it "inherently likely" that Prato's budgeting and planning decisions would really have been affected by receipt of the payments. Dexia was entitled to restitution in the sum of €1.2m.

Effectively, both parties' restitution claims succeeded, and the judge held that the sums due should be set off against each other and a net payment made by Dexia to Prato. Dexia had claimed restitution of €1,252,784 and Prato counterclaimed for €1,580,465, so one would expect Dexia to be ordered to make a net payment of €327,681, but that will be subject to any submissions made by either party in relation to consequential orders.


Perhaps the most significant aspect of this case was the Judge's consideration of which law should apply to Prato's claim for restitution. In deciding that the ISDA Master Agreement's choice of law clause should be disregarded, he disagreed with guidance in a leading choice of law textbook and acknowledged that his "flexible" approach to considering which country was most closely connected had not been adopted in Rome I, Rome II or the Rome Convention.

The Judge's decision to take a different approach from the international regulations may have limited impact, because the flexibility inherent in applying common law principles will only be available in limited circumstances, where none of the regulations apply. Nevertheless, the Court's decision to adopt a flexible approach is important. Indeed, if there is a return to common law principles in place of the application of Rome I and II following Brexit, the impact of this type of flexible approach could become much broader, and it is to be hoped that it is not an indication that Courts will opt for flexibility over certainty.


Laura Berry

Laura Berry

London - Walbrook

+44 (0) 20 7894 6343

Key Contacts

Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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