Top of the swaps: Commercial Court dashes the hopes of Italian local authorities in swaps cases


The English Commercial Court has recently distinguished the Italian Supreme Court decision in Banco Nazionale Del Lavoro S.p.A v Municipality of Cattolica in finding that interest rate swaps entered into by an Italian local authority were binding as a matter of English law. Cockerill J's ruling in Deutsche Bank AG London v Comune di Busto Arsizio [2021] EWHC 2706 (Comm) represents a potential turning point in the long-running series of swaps disputes that have been, and continue to be, litigated in the High Court.

Banco Nazionale Del Lavoro S.p.A v Municipality of Cattolica

The Italian Supreme Court decision in Cattolica had given many Italian local authorities seeking to challenge pre-2008 swaps cause for confidence. In its May 2020 judgment, the Italian Supreme Court had held that (i) certain financial information must be included in the derivative contracts, so as to be provided to the local authority, (ii) the contracts must be designed to hedge risk, rather than be speculative in nature, and (iii) the approval of the city council was required prior to entering into the contracts. In the absence of these three aspects, the Municipality of Cattolica was found to have lacked capacity.

Other local authorities, in similar positions to Cattolica, but whose contracts were governed by English law, therefore pinned their hopes on the findings of the Italian Supreme Court being upheld in England.

Deutsche Bank v Busto Arsizio

 In 2007 Busto Arsizio entered into a mirror swap and interest rate swap with Deutsche Bank to restructure its debt and interest rate hedging arrangements. Whilst initially thought to be favourable to the local authority, the financial crisis in 2008 caused interest rates to drop and the balance of payments in relation to the swaps to shift in favour of the bank. 

Following a period of non-payment by Busto Arsizio, Deutsche Bank commenced proceedings in England to enforce the swaps, arguing that Busto Arsizio had the necessary capacity and authority to enter into the transactions. The local authority counterclaimed against the bank, seeking restitution of sums paid under the swaps and a declaration that missed payments to the bank were not due.

In its defence to Deutsche Bank's claim, Busto Arsizio sought to rely on the decision in Cattolica and said that it was not bound by the swaps in circumstances where it lacked capacity to enter them. It argued that, in accordance with the decision in Cattolica, it lacked capacity and was not bound because: (i) the bank was obliged, but had failed, to provide certain financial information to the local authority on mark-to-market criterion, probabilistic scenarios and hidden costs; (ii) the swaps were speculative in nature; and (iii) whilst its city council was required to approve the swaps, it had not done so.

The Judgment 

In a decision which may have wider implications, Cockerill J held that the English court could depart from an authority of the highest court of a foreign jurisdiction when it was satisfied that, based on the evidence before it, such authority did not represent the general law in relation to capacity and swaps contracts, but was instead confined to a specific set of facts. 

The judge rejected Busto Arsizio's argument and held that Cattolica concerned the material validity of derivatives under Italian law, rather than the limits of Italian local authorities' capacity to enter such transactions in general. She held that Busto Arisizio's reading of Cattolica was inconsistent with the general principles of Italian law relating to the capacity of Italian public bodies, given that they have general civil law capacity, and one would have expected any limit on that capacity to have been explicitly identified by the Italian Supreme Court in its judgment.  As the applicable law of the swaps in this case was English law, the principles of Italian contract law were not relevant and any requirements as set out in Cattolica relating to their material validity were inapplicable.

Cockerill J found that, even if Cattolica had introduced limits on the capacity of local authorities, as Busto Arsizio had argued, then those limits had not been overstepped. Upon entering the swaps, the local authority had been in possession of material disclosed by the bank which enabled it to make an informed assessment of the risk associated with the transactions. Furthermore, the swaps were not speculative, as Busto Arsizio had claimed, but were instead a form of hedging, designed to counteract the interest rate risks that the authority was already exposed to. Since the swaps did not greatly alter its pre-existing borrowing, they did not necessitate the approval of the city council, and even if they did, then such approval was obtained when the finance minister signed the documentation. The council was deemed to have subsequently ratified the transactions when it approved the annual budget.


The judgment will be welcomed by the banking sector in providing clarity on the impact of the Cattolica decision, which had thus far been untested in the English court. Prior to the judgment, it had been unclear whether Cattolica meant that the validity of the swaps under English law could be challenged on certain grounds (namely, insufficient disclosure from the bank to the authority) or that there was a problem more widely with the capacity of local authorities to enter into swaps.

Whilst Cattolica was initially a cause for optimism on the part of the local authorities, its treatment by Cockerill J will now send them back to the drawing board.

This article has been co-written by Luke Barden de Lacroix (Associate) and Annie Long (Trainee Solicitor)

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