In this recent decision, the Commercial Court considered whether an interest swap transaction was void under Italian law.


On 21 February 2005, Intesa Sanpaolo SpA (the “Defendant”) entered into an interest rate swap transaction with an Italian Local Authority known as the Comune di Benevento (the “2005 Swap”). Though the parties restructured the 2005 Swap the following year (the “2006 Swap”), the Comune di Benevento shortly afterward decided to promote competition by inviting banks to submit tenders for a new interest rate swap transaction.

Whilst the Defendant submitted a tender to the Comune di Benevento, it was beaten by HSH Nordbank AG (the “Claimant”). Accordingly, the Claimant replaced the Defendant by a novation of the 2006 Swap on identical terms, save that the 2006 Swap was now subject to English law (the “2006 Novated Swap”). The 2006 Novated Swap was, as intended, then immediately replaced by the terms upon which the Claimant had been successful in its tender (the “2007 Swap”). The Claimant then made a payment to the Defendant of €8,972,000 for the novation of the 2006 Swap.

Following a report by the Italian Ministry of Economy and Finance (the “MEF Report”), the Court of Auditors of the Regional Chamber of Control for Campania in Italy (the “Court of Auditors”) found that the 2007 Swap failed to comply with Decree 389 of 1 December 2003, which, at Art 3 sets out the permissible derivative transactions. After considerable addressing, the Court of Auditors however found that unlike the 2007 Swap, the 2005 Swap and the 2006 Swap were both within the format permitted by Art 3.

The Claimant subsequently sued the Comune di Benevento for a declaration that the 2007 Swap was void and for the return of €672,697.88 paid to the Comune di Benevento under the terms of that transaction. In October 2011, the Claimant and the Comune di Benevento reached settlement on terms that the Local Authority would pay the Claimant the sum of €645,000.

The Decision

These proceedings concern the Claimant’s action against the Defendant on the basis that the 2006 Swap and therefore the 2006 Novated Swap were void for non-compliance with Decree 389 in the following three respects:

That Article 3.2(f) does not permit restructuring of principal but only of interest;
That contrary to Article 3.2(f), the 2006 Swap resulted in an ‘increasing profile of the present values of single payment flows’; and
That there was in effect a premium payable to the Comune di Benevento or in the case of the 2005 Swap an additional premium, rendering these swaps non-compliant with Article 3.2(f).

The Commercial Court was required to decide whether, at Italian law, the 2006 Swap and therefore the 2006 Novated Swap were void. The Commercial Court heard a considerable amount of expert evidence in relation to Italian banking, financial and corporate legislation and addressed each of the three issues raised by the Claimant in turn.

In relation to the first issue, the Claimant conceded that there was no express prohibition of restructuring of principal under Article 3.2(f) but contended that Article 3.2(f) was nevertheless intended to be restrictive in nature. The Commercial Court considered the Claimant’s argument in detail but ultimately preferred the clear construction of Article 3.2(f), as put forward by the Defendant.

In relation to the Claimant’s allegation that there was an increasing profile of the present values of single payment flows, the experts in the proceedings had helpfully identified three alternative calculations (“Options”) open to the Commercial Court in determining whether there had been a breach of Article 3.2(f). It was recognised that the Option 1 and Option 2 would result in an increasing profile (constituting non-compliance with Article 3.2(f)) whereas Option 3 would not. The Commercial Court was not satisfied that the Claimant had proved its case in reliance upon Option 1 or Option 2 and found in favour of Option 3.

In relation to the third issue, the Claimant sought to show that there was a premium payable to the Comune di Benevento and further that the structure of the exchange of interest rates over the first 2 years constituted such an unlawful premium. After considerable expert evidence was heard, the Commercial Court found that the Claimant’s case on this point had not been proved either.

Consequently, the Claimant had failed to show that the 2006 Swap was void under Italian law and the claim was dismissed.


This Commercial Court decision highlights the intricacies of the interest rate swap market and the need for certainty before entering into these type of transactions.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.