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The "I" in "ISDA": English Courts confirm that the ISDA Master Agreement is "international" and limit scope of local law defences


United Kingdom

The Court of Appeal has confirmed that the ISDA Master Agreement is sufficiently international in character as to prevent the application of mandatory rules of local law.

The Court of Appeal has confirmed that the ISDA Master Agreement is sufficiently international in character as to prevent the application of mandatory rules of local law. This confirmation comes in the latest decision1 in a series of challenges by European public authorities that they should benefit from local law provisions that could afford defences to claims by banks under an ISDA Master Agreement. The latest judgment has limited the scope for similar challenges, and has also ended the conflict that existed between the first-instance decision in this dispute and a previous, factually similar, High Court case (subsequently approved in the Court of Appeal2) on which we reported in March 2016. (This decision does not affect how English courts will recognise and enforce other jurisdictions' insolvency regimes.)

In this most recent case, an Italian local authority had successfully argued before the High Court that certain mandatory provisions of Italian law should apply to its dispute with its bank counterparty (Dexia Crediop), notwithstanding the choice of English law as the governing law of the ISDA Master Agreement in place between the parties. In this case, those mandatory provisions provided a defence to the bank's claim for payments due from the local authority under interest-rate swaps. Article 3(3) of the Rome Convention (which has been superseded by the Rome I Regulation 593/2008 for contracts made after 17 December 2009) provides that, irrespective of a chosen governing law, mandatory provisions of local law should apply if all other "relevant" elements are connected with the country of that local law. The High Court held that the use of the ISDA Master Agreement was not a "relevant" element (in this case, the swaps were entered into in Italy between parties both incorporated in Italy, communications between the parties took place in Italy, the bank was subject to the Italian financial services regime and the obligations under the swaps were to be performed in Italy).

The Court of Appeal overturned that decision and confirmed the approach of both the High Court and the Court of Appeal in the previous case (involving a Portuguese subsidiary of Banco Santander), where it was held that (a) the use of a 1992 ISDA Master Agreement (Multicurrency – Cross Border) and (b) the bank having hedged its exposure under the swaps with back-to-back transactions with foreign banks were each on its own sufficient to constitute an international "relevant" element so that Article 3(3) did not apply.

The Court of Appeal decision in Dexia confirms the international nature of the ISDA Master Agreement and that the use of it is "self-evidently not connected with any particular country and is used precisely because it is not intended to be associated exclusively with any such country". (Both Santander and Dexia concerned a 1992 ISDA Master Agreement (Multicurrency – Cross Border), and each judgment seems to have given some weight to the existence of the alternative version, in the form of the 1992 Master Agreement (Single Currency – Single Jurisdiction). However, we would be surprised if the position would be any different if a 2002 ISDA Master Agreement were used.)

Although this decision gives parties a better degree of certainty as to which law will be applied when using the ISDA Master Agreement, it is worth noting that the Court of Appeal made it clear that the question of whether the local authority had capacity to enter into the swaps remains governed by (in this case) Italian law. This reinforces the need for banks to undertake full due diligence when transacting with local government authorities and other public law entities.

1               Dexia Crediop S.p.A v Comune di Prato [2017] EWCA Civ 428

2               Banco Santander Totta SA v Companhia Carris de Ferro de Lisboa SA & Ors [2016] EWCA Civ 1267

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