Court of Appeal upholds Financial List decision on applicability of Article 3(3) Rome Convention in interest rate swaps transactions

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Court of Appeal upholds Financial List decision on applicability of Article 3(3) Rome Convention in interest rate swaps transactions

Published 2 febrero 2017

Banco Santander Totta SA v Companhia de Carris de Ferro de Lisboa SA & others

In the first appeal to be heard from the new Financial List, the Court of Appeal has provided clarification on the proper meaning of Article 3(3) of the Rome Convention1 in the context of interest rate swap transactions and resolved the High Court's conflicting approaches in this case and Dexia Crediop Spa v Commune Di Prato (which was discussed in our April and December 2016 Journal articles).


From 2005-2007, the appellants, Portuguese public transport companies ("the TCs"), entered into long-term interest rate swaps with the respondent, a Portuguese entity within the Santander banking group ("Santander") under ISDA Master Agreements subject to English law and jurisdiction ("the Swaps").

Interest rates payable by the TCs under the Swaps increased very substantially (to more than 92%) following the financial crisis, and, in 2013, the TCs ceased making payments. Santander issued proceedings in the English courts, seeking a declaration that the TCs' obligations under the Swaps were legal, valid and binding, as well as repayment of the sums due (which, by October 2015 totalled almost €300 million).

The TCs argued that although the ISDA Master Agreements specified English governing law, Article 3(3) of the Rome Convention required mandatory rules of Portuguese law to be applied, pursuant to which the swaps were void for being unlawful "games of chance".

First instance decision

Our April 2016 Journal article discusses the first instance decision in detail. In short, Mr Justice Blair held that not all the elements relevant to the transactions were connected with Portugal. There were also international elements (including the use of international standard documentation), and as a consequence the provisions in Article 3(3) were not engaged. There was no requirement to consider Portuguese mandatory rules, the choice of English law under the ISDA Master Agreement was upheld and the swaps were valid.


The TCs appealed on four grounds: (i) the meaning of "elements relevant to the situation" in Article 3(3); (ii) what "relevant elements"; should be taken into account; and (iii) and (iv) the application of Article 3(3) to Portuguese mandatory rules. Having disposed of the first two grounds of the appeal, the Court did not need to deal with grounds (iii) and (iv).

Ground 1: The TCs suggested that the correct question is whether all the elements are connected with more than one country, and that, had that question been asked the Court would have concluded that all elements pointed to a single country, namely Portugal.

The Court of Appeal rejected this argument, stating that the enquiry under Article 3(3) should include consideration of elements that point directly from a purely domestic to an international situation. The Court stated that Article 3(3) should be approached as a limited exception to the starting point of party autonomy in terms of choice of law, and should therefore be construed narrowly.

The Court of Appeal disagreed with the High Court in Dexia confining its enquiry to those factors with a connection to a particular country. Any element pointing away from a purely domestic situation is relevant.

Ground 2: The TCs argued that when applying Article 3(3), the High Court wrongly gave weight to the use of standard ISDA documentation and a provision enabling Santander to assign its rights and obligations to any group subsidiary (amongst other things).

The Court of Appeal rejected this argument as well, noting that the High Court had carried out a detailed evaluation of the various "elements relevant to the situation", and advised caution in interfering with evaluative exercises carried out at first instance, particularly by specialist courts such as the Financial List.


This case is reassuring to those in derivatives markets as it supports parties' autonomy and promotes contract certainty in circumstances where an express choice of law has been made. The Court of Appeal has also provided a welcome clarification on the previous contradiction between the High Court's decision in this case and that in Dexia. In this first appeal from the new specialist Financial List, the Court of Appeal's clear reluctance to interfere with what it described as an "expert and specialist court" is also of interest.

1 Article 3(3) of the Rome Convention applies to contracts entered into before December 2009, and states that the fact that parties have chosen a foreign law does not, where all the other "elements relevant to the situation" are connected with one country only, prejudice the application of the mandatory rules of that country.




Laura Berry

Laura Berry

London - Walbrook

+44 (0) 20 7894 6343

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Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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