Interest rate swaps—private international law—lack of capacity under foreign law—unjust enrichment—applicable law—availability of change of position—stultification—limitation

The City of Venice entered into two interest rate swaps in December 2007 with Italian banks as part of a re-structuring of its public debt, branded as Rialto Bonds. The swaps replaced by novation an earlier transaction with Bear Sterns. The swaps were pursuant to the 1992 ISDA Master Agreement and were governed by English law. The banks entered into back-to-back hedging swaps. In May 2020, the Italian Supreme Court issued a decision in another swaps case, Cattolica (Joint Civil Divisions of the Italian Court of Cassation and Supreme Court: Decision 8770/20, Banca Nazionale Del Lavoro SpA v Municipality of Cattolica), following which Venice informed the banks that it would continue to make payments pursuant to the transactions, but without prejudice to an intended claim that they were a nullity. The banks sought declarations that the swaps were valid. Venice sought declarations to the opposite effect, and consequential relief in unjust enrichment of the net amounts paid under the transactions.

Foxton J held, having heard expert evidence on Italian law, that Venice lacked capacity because the swaps were predominantly speculative, and involved indebtedness other than for the purpose of investment. As a consequence, the swaps were void under English law, and Venice was entitled to claim the net sums paid in unjust enrichment, but the banks were in principle entitled to rely on a defence of change of position in respect of payments made under the back-to-back hedging swaps. The judge further held that Venice could not have discovered that it had a worthwhile claim prior to the decision in Cattolica. Accordingly none of its claims were time-barred.

The banks appealed. Venice cross-appealed, contending that the counterclaim for restitution was governed by Italian law, under which it was common ground that the banks were not entitled to a change of position defence.