The Italian Supreme Court’s Interpretation of the Jurisdiction Clause Favoring English Courts Contained in ISDA Master Agreements

Author:Mr Alessandro Corno, Locke R. McMurray, Lamberto Schiona, Harriet Territt and Margherita Magillo
Profession:Jones Day

The Italian Supreme Court ("Supreme Court" or "Court") recently had the opportunity to have its say, for the second time, concerning the scope of the jurisdiction clause favoring English courts and contained in International Swaps and Derivatives Association ("ISDA") Master Agreements. The action was prompted by a pair of separate transactions involving two Italian municipalities and certain international banks and financial institutions.

ISDA Master Agreements are standard agreements, published by the ISDA and used in over-the-counter derivatives transactions. The agreements establish terms applied to agreed derivatives transactions between two parties. By this mechanism, agreement is reached to abide by the standard stipulations and renegotiation of general terms is avoided each time a new derivatives transaction commences.

The agreement typically contains a jurisdiction clause in its Art. 13, which provides as follows: "[w]ith respect to any suit, action or proceedings relating to this Agreement ... each party irrevocably ... submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law" (emphasis in italics added). In the cases in question, the master agreements appeared to have been subjected to English law as substantive law.

The Supreme Court assessed the relevance and scope of such jurisdiction clause in two similar cases where Italian municipalities—which had entered into ISDA Master Agreements with several banks and financial institutions—sued before Italian courts in order to seek redress for the negative consequences they suffered as a result of their counterparties' behavior in the context of the relevant transactions. In both cases, the municipalities' first claim was for damages in tort allegedly caused by the defendants' unlawful conduct before the conclusion of the contract (i.e., the so-called precontractual liability). In addition, both municipalities allegedly brought concurrent claims for contractual liability due to their breach of the collateral consultancy agreements.

The first case, which involved the Municipality of Milan, was heard by the joint divisions of the Supreme Court on February 24, 2012.1 The second case, which mirrored the first one, involved the Municipality of Venice and was decided on September 18, 2014.2 The first decision established that Italian courts were competent to hear the dispute, despite the mentioned jurisdiction clause, which according to the Supreme Court did not extend to tort claims, as the defendants sought to argue. The second decision reconfirmed the first ruling in full.

Factual Background

In the first case, the Municipality of Milan, in the context of a complex debt restructuring transaction—which included collateral consultancy provided by the banks—issued a 30-year debenture loan in 2005 for more than 1.6 billion euro and concluded four identical contracts, each including an amortizing swap agreement and an interest rate swap collar. The amortizing swap agreement with each bank was governed by an ISDA Master Agreement and by the provisions detailed in attached schedules and confirmations. The ISDA Master Agreement contained the above-mentioned jurisdiction clause (i.e., submitting to English courts) in its Art. 13.

In 2008, a pool of experts appointed by the municipality found that the entire transaction was fraudulently imbalanced in favor of the banks and the financial institutions due to the existence of implicit costs incorporated in the swaps...

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