Court of Appeal confirms that Portuguese “mandatory” law is no defence to swaps liability

Earlier this year (see my March post), Blair J held that Lisbon based transport companies could not use “mandatory” provisions of Portuguese law to defeat a multi-million Euro claim by Santander under interest rate swaps contracts.  The Court of Appeal has now upheld this decision in Banco Santander Totta SA v Cia Carris de Ferro de Lisboa SA [2016] EWCA Civ 1267 (main judgment, Sir Terrance Etherton MR).

In short, under article 3(3) of the Rome Convention, a “mandatory” provision of national law could only displace the parties’ express choice of law in a contract if the situation is truly domestic – an “international situation” (even if not pointing to a specific other country) is sufficient to prevent article 3(3) applying.

Article 3(3) of the Rome Convention – mandatory law

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 first question on appeal – are factors pointing to an “international situation” relevant?

The key to article 3(3) is whether “all the other elements relevant to the situation … are connected with one country only”.  The first question for the Court of Appeal was whether it was legitimate for the judge to look at elements that pointed to “an international situation” but not necessarily to another specific country.  Blair J had looked at such factors.

Blair J’s approach was upheld.  The Court of Appeal accepted that, as relevant, “the only question under article 3(3) … is whether the situation is purely domestic.” [57].  Thus, the inquiry under article 3(3) included elements that pointed away from a purely domestic to an international situation.

It is worth noting that the court specifically rejected the Transport Companies’ reliance on Paul Walker J’s decision in Dexia Crediop v Prato [2015] EWHC 1746 (Comm) – a decision which was apparently at odds with Blair J in this case.

The second question on appealincorrect emphasis on specific factors?

The appellants argued that Blair J had given incorrect weight to various factors including the use of standard form documentation (the 1992 ISDA master agreement), the international nature of the swaps market and the existence of back to back transactions between Santander Spain and a Portuguese bank.

The Court of Appeal refused to interfere with Blair J’s evaluation of these factors.  The usual reluctance of the Court of Appeal to interfere with such evaluation was heightened in this case because the appeal was “from an expert and specialist court, the Financial List”.

As a result, the judge’s decision that article 3(3) of the Rome Convention did not apply was upheld – the case was not a purely domestic one – there was thus no defence available based on “mandatory” Portuguese law.

A disagreement between the MR and Longmore LJ?

The final point on appeal did not have to be decided.  Nevertheless, this was briefly addressed and, because there seems to be some difference between the Master of the Rolls and Longmore LJ, is covered here.

The issue concerned article 3(3)’s definition of mandatory rules as ones “which cannot be derogated from by contract”.  The Transport Companies argued that this meant that derogation was not possible at the time the choice of law was made (i.e. ex ante); in other words at the time of contracting.  The bank argued that a rule of national law would not be “mandatory” if the parties could derogate from it ex post (i.e. after contracting and the relevant facts arising) even if they could not reach that agreement ex ante.

Sir Terrance Etherton MR (with whom Sir Martin Moore-Bick agreed) agreed with the Transport Companies.  He held (obiter dictum) that it was consistent with the purpose of article 3(3) of the Rome Convention for the test to be only an ex ante one.  That is, the question about derogation was to be asked at the time of contracting.  Any ex post attempt to derogate could only be effective as a voluntary refusal to enforce rights.

Longmore LJ sounded “a note of caution”, however.  He described the relevant provision of Portuguese law as a “force majeure” provision.  On this basis, he suggested, it was to fill a gap which the parties had left unexpressed in their agreement.   His concern was that “if filling every such gap is to be regarded as [a] non-derogable provision, that would mean that much of a country’s contract law would have to be regarded as non-derogable.”  In view of the potential significance of that point, he preferred to leave the matter undetermined until it was strictly necessary to do so.

There is thus scope for more case law on the meaning of article 3(3) of the Rome Convention – watch this space!