This case (Banco Santander Totta SA v Companhia de Carris de Ferro de Lisboa SA  EWHC 465 (Comm)), arises from a number of complex swap contracts under which, by October 2015, some EUR 272 million were due but not paid.
In his judgment on 4 March 2016, among other things, Blair J decided that Article 3(3) of the Rome Convention  could not be used to displace a contractual choice of English law with certain mandatory provisions of Portuguese law even where both contracting parties were Portuguese. Had he held otherwise, Portuguese law might have provided a complete defence to payment. Blair J’s decision was clearly influenced by the desirability of legal certainty in major financial transactions and upholding party autonomy.
Blair J’s decision is notable because his conclusion is at odds with that of Walker J in a similar case involving Italian parties (Dexia Crediop SpA v Comune di Prato  EWHC 1746 (Comm)).
There, Walker J held that the parties’ express choice of law was overridden by certain mandatory Italian laws. That judgement is under appeal. Given that this form of argument is common in many cases (particularly involving guarantees and swaps), it is hoped that the Court of Appeal will address both that judgment and this one soon.
Also of interest in the judgment, from a conflicts of law perspective, is Blair J’s summary of principles applicable to expert evidence on foreign law. Note too that this was the first case to be heard in the Financial List.
The case is a result of the financial crisis of 2007/2008. The four defendants (the Transport Companies) are public sector Portuguese transport companies. The claimant (the Bank) is a Portuguese bank and part of the Banco Santander group.
The Transport Companies had entered into swaps with the Bank. The swaps are complex and are known as “snowball” swaps because of particular memory and leverage features. As the court found, the purpose of the swaps was to reduce the amount of interest being paid by the Transport Companies on certain underlying transactions. This worked for the early years but, once interest rates dropped to near zero (from 2009), the swaps very substantially increased the interest rates payable.
By 2013, the Transport Companies had ceased to pay under the swaps and asserted that the transactions were void and unenforceable. By 2015, over EUR 272 million was owed to the Bank.
The English court had to decide the following main questions.
Only the second question is covered in detail this post (see below) although a summary of the judge’s conclusions on the first and third questions is provided. The judge’s guidance on the proof of foreign law is summarised (at the end of this post).
The Transport Companies wanted to rely on defences arising from Portuguese laws which applied to “games of chance” and “abnormal change of circumstances”. To do this, they had to displace the parties’ choice of English law under the ISDA Master Agreement governing the swaps. The Transport Companies relied on Article 3(3) of the Rome Convention. This 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’.”
Two questions arose.
Article 3(3) requires the court to examine “all the other elements” (aside from the choice of law and possibly jurisdiction clauses) “relevant to the situation at the time of choice [of foreign law]”. Only if all of those elements are connected with one country is it possible to displace the application of the parties’ chosen law.
Blair J decided that the elements to be examined were not limited to those local to another specific country (i.e. other than Portugal). The relevant factors could include elements which simply pointed towards an international rather than a domestic situation (including, in this case, the use of international financial contracts). The court therefore rejected the Transport Companies’ submission that the Bank had to identify a factor which would, on a general conflicts of law approach, be regarded as favouring the choice of another specific foreign law.
In reaching this conclusion, the court had regard to the underlying policy of Article 3(3). That was to prevent parties from avoiding internally mandatory rules in what were for all practical purposes purely domestic cases. It was not necessary, however, to show evasiveness or bad faith by the parties seeking to contract out of mandatory national rules.
Blair J’s decision was also influenced by the desirability of legal certainty; he held that “at least in the context of major financial contracts … legal certainty is an important consideration”. In addition, he had regard to the general principle that party autonomy (freedom of choice of law in contract) was recognised in European law (e.g. by Article 3(1) of the Rome Convention).
Differing from Walker J in Dexia v Comune di Prato, Blair J emphasised that in financial transactions: the use of ISDA or other standard documentation used internationally could be relevant; so too could the existence of other back-to-back transactions involving other countries.
Applying these principles, Blair J held that Article 3(3) of the Rome Convention was not engaged in this case. He said, “Any other conclusion, the court believes, would undermine legal certainty.” The main factual points identified to support this conclusion were: the right to assign to a bank outside Portugal, the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market in which the contracts were concluded, and the fact that back-to-back contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements were routine.
Strictly, once it had been held that not all the other elements relevant to the situation pointed to Portugal, this question did not need to be answered. Nevertheless, it was. Blair J concluded that the relevant Portuguese law (Article 437 of the Portuguese Civil Code) was not mandatory.
Under Portuguese law, once the circumstances that would engage Article 437 had arisen, the parties were entitled to agree that they would not rely on Article 437 (an “ex post agreement”). Blair J held that it is sufficient to take a rule out of Article 3(3) of the Rome Convention if the rule could be disapplied by agreement between the parties even if the agreement was ex post (rather than ex ante).
Blair J considered this conclusion to be “consonant with commercial sense” and observed that at least in the context of financial contracts like swaps, there seemed to be no reason why the issue of a fundamental change of circumstances would not be referred to the law chosen by the parties.
The first point argued in the case was whether the Transport Companies had the capacity to enter into the swaps. The judge held that they did. The decision was made as a matter of Portuguese law after analysis of the expert evidence. As Blair J noted, the question of capacity was outside the scope of the Rome Convention and, in broad terms, was governed by the law of the place of incorporation (Haugesund Kommune v Depfa ACS Bank  EWCA Civ 579).
The judge also noted as a matter of “legitimate comment” that the issue of capacity had not been raised: (1) in relation to similar swaps closed out by public enterprises at considerable expense in 2013; and (2) during the Portuguese Parliamentary Inquiry into these swaps. He said “if the capacity defence is correct, all of [the persons involved in those events] … were wrong and simply overlooked an obvious and critical point.”
Although it would have been of some general interest, the judge did not decide on the Bank’s alternative argument on this point. That is, the Bank’s argument that under English law and under the provisions of the Portuguese Companies Code giving effect to the abolition of the ultra vires doctrine by the EU Company Law Directives (68/151/EEC and 2009/101/EC), the swaps were in any event valid.
The final point argued in the case was whether the Bank was in breach of duties under the Portuguese Securities Code.
The parties effectively agreed that the Transport Companies’ claims were to be treated as arising in tort and thus as non-contractual obligations falling outside Article 3(3) of the Rome Convention. The Bank also accepted that Portuguese law was to be applied regardless of the contractual choice of English law.
Blair J also raised the possibility that the regulatory provisions of this kind would apply regardless of any choice of law. In this context, he noted that their function was to implement in Portuguese law EU directives containing common conduct rules applicable financial services business. He did not decide the point, however.
Having considered the expert evidence on Portuguese law, Blair J concluded that there was no breach of the Portuguese Securities Code by the Bank.
As noted already, the content of Portuguese law had to be decided by the English court. The judgment provides a convenient summary of the English court’s approach to this exercise. Foreign law is a question of fact to be proved by expert evidence. Where the foreign law is a civil system rather than a common law system with a clear doctrine of precedent, as Blair J noted, more extensive expert evidence may well be needed.
The key points on the role of the expert and the court are as follows.
 The Convention on the Law Applicable to Contractual Obligations 1980.
 Note that the Rome Convention applies rather than the Rome I Regulation (Regulation No 593/2008) because the contracts were agreed before 17 December 2009. The equivalent provisions of the regulation are differently worded.