Choice of English law presides in ISDA Master Agreements – Court of Appeal confirms

The Court of Appeal has upheld an earlier decision of the High Court that the law applicable to interest rate swaps entered into between a Portuguese bank and a number of Portuguese transport operators is English law.

In Banco Santander Totta SA v Companhia de Carris de Ferro De Lisboa SA & Ors [2016] EWCA Civ 1267, a number of state owned Portuguese transport operators sought to overturn the ruling of the High Court. At first instance, it was held that Article 3(3) of the Rome Convention 1980 (“Rome Convention”) did not apply to nine swaps because the swaps had an international element and not all elements of the swaps were solely connected with Portugal. Our earlier Law-Now reported this decision, setting out the facts and key findings of the case. This can be read here.

Article 3(3) of the Rome Convention provides:

“The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law of that country which cannot be derogated from by contract, hereinafter called ‘mandatory rules’”.

The appeal

The transport companies did not appeal Blair J’s rejection of three of their defences i.e. that they lacked capacity, that the swaps were entered into in breach of Portuguese securities law and that the swaps were voidable as unlawful. The appeal was limited to the proper interpretation of Article 3(3) of the Rome Convention. The transport companies submitted that on the correct interpretation of Article 3(3), the swaps were liable to termination or modification pursuant to Article 437 of the Portuguese Code.

The key components of this argument were:

1. The purpose of Article 3(3) of the Rome Convention was to ensure that contracts which are not objectively international in a conflict of laws sense, and fall within the Rome Convention only because of a choice of law by the parties, remain subject to the mandatory rules of what is objectively the proper law. Had Blair J conducted the correct enquiry, he would have concluded that the relevant elements at the time of the parties’ choice of law were all located in Portugal.
2. That the swaps were between Portuguese parties, the transport companies dealt only with Portuguese officers of the bank in negotiation, and the transport companies were unaware of the international nature of the bank’s hedging arrangements. The judge should have concluded on admissible matters that nothing pointed “directly” to an international situation for the purpose of Article 3(3).
3. That the question of whether a rule of law could be derogated from by contract had to be determined when the choice of law is made, not at a later date.
4. In light of the above, Blair J should have concluded that Article 437 of the Portuguese Code applied to the swaps. The court should therefore exercise its power to modify or terminate the swaps.

The decision

In dismissing the appeal the Court of Appeal held:

1. Blair J’s interpretation of Article 3(3) gives effect to the fundamental principle of party autonomy and the objective of certainty underlying the Rome Convention and is consistent with the actual wording of its provisions. The Court confirmed the trial judge’s view that the words “elements relevant to the situation” used in Article 3(3) are wider than the factors of a kind which connect the contract to a particular country for the purpose of identifying the proper law in the absence of an express choice.
2. There was no error of principle in Blair J’s assessment of the international nature of the swaps. It would simply be impossible for the Court of Appeal to say that he was plainly wrong.

This decision reinforces the parties’ autonomy, under English law, of choosing the applicable law to a contract. This is particularly helpful for users of market standard forms like ISDA Master Agreements as it gives them certainty in relation to their contractual frameworks.

The appeal is the first appeal from the Financial List, the specialist list in the High Court set up to handle claims related to the financial markets. In Banco Santander the Court of Appeal made the uncontroversial statement that the Court of Appeal should not interfere with the evaluation of a High Court judge unless there was an error of principle or the evaluation was plainly wrong. Notably, this statement was followed by express recognition that the Court of Appeal should be particularly cautious of reaching such a conclusion if the appeal is from an expert and specialist court, the Financial List. This is a clear statement recognising the elevated status of decisions from the Financial List for complex claims related to the financial markets.