Exclusive means exclusive: High Court decides that English courts have jurisdiction in Italian swaps dispute

In yet another Italian swaps case to be dealt with by the English courts, the High Court found that an ISDA Master Agreement governing swaps for the Province of Trentino was valid and gave exclusive jurisdiction to the English courts (Dexia Crédit Local S.A. v Patrimonio del Trentino S.p.A. [2024] EWHC 2717 (Comm)).

Background

Patrimonio del Trentino S.p.A. ("Trentino") is an Italian joint stock company incorporated to manage the assets of the Italian Province of Trentino (the "Province").

In 2008, the Province wanted to use Trentino to build a new science museum to be funded by grants payable by the Province to Trentino over 30 years (the "Grants") and bonds to be issued by Trentino (the "Bonds"). The terms of the project provided that Trentino's liabilities under the Bonds could not exceed the sums it was due to receive under the Grants.  However, the interest payable by Trentino on the Bonds was at a floating rate, whereas the Grants paid by the Province to Trentino were at a fixed rate; There was therefore a risk that the floating rate interest payable by Trentino under the Bonds might in future exceed the fixed rate it received under the Grants.

To hedge this interest rate exposure, Trentino approached Dexia about entering into derivative transactions. Thereafter, Dexia and Trentino entered into an ISDA Master Agreement in October 2010 containing a bespoke jurisdiction agreement in the following terms (the "Jurisdiction Agreement"):

Jurisdiction. With respect to any suit, action or proceedings relating to any dispute, whether contractual or non-contractual, arising out of or in connection with this Agreement (“Proceedings”), each party irrevocably

(1) submits to the exclusive jurisdiction of the English courts;

(2) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; and

(3) agrees, notwithstanding the above and to the extent permitted by applicable law, that the bringing of Proceedings before the English courts will not preclude the bringing of Proceedings before the Italian courts.

In February 2011, several months after the ISDA Master Agreement was executed, Dexia and Trentino entered into the relevant interest rate swap transaction (the "Swap").

Trentino performed its obligations under the Swap for more than 10 years.  However, in 2023, Trentino suddenly issued proceedings in the Italian Court arguing that the Swap was invalid as a matter of Italian law.

In response, Dexia issued proceedings in the English Commercial Court seeking declaratory relief (the "English Proceedings").  In serving the English Proceedings out of the jurisdiction on Trentino, Dexia relied upon CPR r.6.33(2B) which enables a party to serve out of the jurisdiction without permission where the relevant contract contains a jurisdiction clause (whether exclusive or not) in favour of the English Court.

Trentino challenged the jurisdiction of the English Court to hear Dexia's claim and argued:

(1) the ISDA Master Agreement between Dexia and Trentino was void as a matter of Italian law, such that the Jurisdiction Agreement was of no effect and Dexia had not been entitled to rely on CPR r.6.33(2B) to serve out of the jurisdiction; and

(2) Alternatively, if the ISDA Master Agreement was valid, the Jurisdiction Agreement was non-exclusive and the English Proceedings should be stayed on the grounds of forum non conveniens.

Was the Jurisdiction Agreement valid?

In arguing that the ISDA Master Agreement was void, Trentino asserted that the Swap was speculative and that, as a matter of Italian law, it lacked capacity to enter into speculative derivatives. Trentino then sought to treat the Swap and the Master Agreement as a single agreement and argued that, if the Swap was invalid, that also impugned the umbrella Master Agreement too.

The judge had no hesitation in dismissing this ambitious argument and found that, even if Trentino had lacked capacity to enter into the specific Swap, that did not mean that Trentino had also lacked capacity to enter into the Master Agreement itself. It is well established that the Master Agreement will remain valid even if some or all of the transactions governed by it are void for lack of capacity.¹

In any event, the judge also found that Dexia had a good arguable case that the Swap was not speculative; the Swap was intended to hedge Trentino's exposure to the mismatch between the fixed rate it received under the Grants and the floating rate it paid on the Bonds. Further, in separate proceedings with the Italian tax authorities, Trentino was arguing that the Swap was a hedging instrument and not speculative.

Was the Jurisdiction Agreement exclusive or non-exclusive?

Trentino's alternative case was that, as a matter of construction, the Jurisdiction Agreement was non-exclusive such that the English Court was not bound to accept jurisdiction and it was open to it to stay the English Proceedings in favour of the Italian Proceedings on forum non-conveniens grounds.

Trentino submitted that the Jurisdiction Agreement was a hybrid clause that provided for the English Court to have exclusive jurisdiction against the rest of the world apart from Italy and that the English and Italian courts had concurrent jurisdiction.  In support of this argument, Trentino submitted that the default position under the standard ISDA jurisdiction clause was that the chosen court had non-exclusive jurisdiction.  Trentino also submitted that sub-clause (3) of the Jurisdiction Agreement had to be given effect and that the language of sub-clause (3) of the Jurisdiction Agreement was consistent with it being a carve-out from the exclusive jurisdiction conferred in sub-clause (1).

The judge disagreed and determined that the Jurisdiction Agreement provided for the exclusive jurisdiction of the English Court.  In particular, the Judge noted that the parties had agreed to  modify the standard ISDA jurisdiction clauses and that, following these modifications, sub-clause (1) of the Jurisdiction Agreement expressly provided for the "exclusive" jurisdiction of the English Court.  These words had to be given their ordinary meaning.

In construing the Jurisdiction Agreement, the judge found that an important part of the relevant factual matrix was the fact that, at the time the parties had entered into the Master Agreement in 2010, both England and Italy had been EU member states and subject to the jurisdictional regime contained in the Brussels Regulation.  Under the Brussels Regulation, in order to ensure the English Courts had jurisdiction, as was expressly contemplated in the Jurisdiction Agreement, the Jurisdiction Agreement had to be exclusive. If the jurisdiction clause was non-exclusive and proceedings were first commenced in Italy and not England then, under the Brussels Regulation in force at the time, the Italian Court would have had jurisdiction (as the court first seised) and the English Court would have been required to decline jurisdiction. The Judge held that this was nonsensical and could not be what the parties had intended; the words of sub-clause 1 “exclusive jurisdiction” had to be given effect and their ordinary meaning.

The Judge determined that sub-clause (3) could still be read in a manner that was consistent with an exclusive jurisdiction clause in favour of the English Court. Rather than enabling substantive proceedings to be commenced in Italy, the carve-out in sub-clause (3) was intended to permit ancillary proceedings that might be brought in Italy in support of the primary English Proceedings, such as proceedings seeking provisional or protective measures.

Comment

This judgment is the latest in the long line of Italian swaps disputes and provides a useful restatement of the law regarding lack of capacity arguments in the context of the ISDA Master Agreement. It reaffirms that, even if certain transactions entered into under the Master Agreement umbrella are invalid for lack of capacity, that does not call into question the validity of the Master Agreement itself.

While the discussion around the interaction between the jurisdiction clauses in an ISDA Master Agreement and the Brussels Regulation will be of specific interest to derivatives practitioners, the judgment also contains general guidance on the construction of jurisdiction clauses that is of wider application.

The judgment also includes further judicial criticism of the proliferation of foreign law expert evidence being served in jurisdiction challenges. The court was critical of the parties for serving lengthy Italian law expert evidence without permission and found that much of the evidence was irrelevant to the jurisdiction challenge.  This is not the first occasion on which the Court has criticised the extent of foreign law expert evidence served in jurisdiction applications and again emphasises the importance of parties seeking permission before adducing such evidence.²