Thu, Jul 18, 2024

The official Financial Regulation Journal of SAIFM

ISDA Master Agreement – Court of Appeal favours chosen law over local “mandatory laws”

By Alexander Hewitt


When commercial parties choose English law to govern their hedging or financing contracts, the English courts will usually apply that choice with very few exceptions. A recent Court of Appeal case further narrows one such exception (the Article 3(3) Exception): Dexia Crediop SpA v. Comune di Prato [2017] EWCA Civ 428.

In narrowing the Article 3(3) Exception, the court in Dexia applied another recent Court of Appeal ruling: Banco Santander Totta v. Companhia Carris De Ferro De Lisboa [2016] EWCA Civ 1267. This:

  • makes Dexia a particularly strong precedent; and
  • shows a strong trend in the case law towards giving participants in the swaps market who use the ISDA Master Agreement a high degree of certainty that the English courts will apply their chosen governing law.

The dispute

An Italian local authority (Prato) defaulted under a swap concluded with Dexia under the ISDA Master Agreement Multi-Currency – Cross-Border form (the Swap). The Swap contained an express choice of English governing law and jurisdiction. Among other arguments against making payment, Prato invoked the Article 3(3) Exception. They pointed to the fact that both parties were Italian and the Swap provided for payment in Italy. This, argued Prato, meant the Swap did not bind them, because it did not comply with certain “mandatory rules” of Italian law which, they argued, overrode the chosen English law.

The Article 3(3) Exception to the chosen law

For contracts concluded from 17 December 2009, this exception arises under article 3(3) of the Rome I Regulation (593/2008) (Rome I). For contracts made between 1 April 1991 and Rome I coming into force, the Article 3(3) Exception arises under the (similarly drafted) article 3(3) of the Rome Convention.

The Swap was entered into when the Rome Convention applied. The Rome Convention version of article 3(3) reads:

“The fact that the parties have chosen a foreign law … 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 the contract, hereinafter called “mandatory rules”.

So, under article 3(3):

  • parties may have chosen one state’s laws as their governing law; but
  • if all elements (apart from that above choice) “relevant to the situation at the time of the choice are connected with one” other “country only”:
  1. the Article 3(3) Exception applies; and
  2. consequently, mandatory rules of that one other country may override the chosen law.

Relevant international element precludes all relevant “elements” being connected with one country only

Following the Banco Santander Totta ruling, the Court of Appeal in the Dexia case held that, as the Swap had an “international element”, that meant:

  • the Swap could not be exclusively connected with a single country (Italy) other than the country of the chosen law; and
  • the chosen law applied, and not mandatory rules of Italian law under the Article 3(3) Exception.

Use of ISDA documents as international elements

The court found these features of the Swap gave it an international character:

  • use of the ISDA Master Agreement, which is inherently an international standard form rather than a contract connected with any one country;
  • in particular, use of the Multi-Currency – Cross-Border version of the ISDA Master Agreement, which, the court noted, envisaged more than one currency and country, and was in the English language, which was not the first language of either party to the Swap; and
  • the “highly significant” fact that Dexia had (as, the court recognised, was routine in this market) hedged its position under the Swap with back-to-back swaps with non-Italian banks. This showed “just how international the swaps market actually is”, said the court.

Rome I

As noted above, the drafting of article 3(3) Rome I and article 3(3) of the Rome Convention is similar, if not identical. This makes the Dexia case highly relevant to the application of article 3(3) Rome I to contracts made on or after 17 December 2009.

- Advertisement -spot_img

Latest Articles