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12 February 2019
The Milan Court of Appeals recently rejected an appeal against a Milan Court of First Instance judgment in which a leading Italian bank had won a lawsuit. The dispute concerned an interest rate swap derivative contract.
The Court of Milan judgment confirmed existing case law and found that the purpose of the contract was the exchange of differentials rather than the mark to market. The latter represents "the replacement value of the derivative at a given time"; however, as this did not take place in practice, the fact that the quantification of the mark to market indicated in the contract could change during the course of the relationship was deemed irrelevant.
In the first-instance proceedings, the complainant had asked the Milan Court of First Instance for a statement of nullity regarding an interest rate swap contract signed with a bank in 2011, claiming that the purpose of the contract could not be determined and no adequate risk exposure information had been provided. As a result, the complainant claimed compensation for the negative differentials generated by the contract.
The court excluded any reason for nullity of the contract. The complainant appealed the decision while the defendant requested confirmation of the judgment (or, in the alternative, the reduction of the claims by the opposing party).
According to the complainant, the mark to market coincided with the "discounted sum of future differentials expected" which represented "the temporal dimension of the differential between opposing financial flows". The complainant also argued that "the mark to market is nothing more than the value of the contract at issue on a certain date" and "is placed as a cost to be borne by the customer in the event of early termination of the derivative".
Countering this thesis with reference to precedent case law, the Milan Court of Appeals observed that "the purpose of a derivative contract is the exchange of differentials calculated on a certain amount called the notional amount at a certain maturity" and that the purpose is "actually indicated in the contract if the customer parameter rate and the bank parameter rate are provided". The court also commented that "the mark to market... is a different element, which, precisely, represents the replacement value of the derivative at a given time".
The complainant had also criticised the failure to deliver probable scenarios, which in its view would "make the contract undeserving to exist" pursuant to Article 1322 of the Civil Code. However, the Milan Court of Appeals deemed that the reference to said article was inappropriate, as it merely sets out the general principle of agreement autonomy. Further, the claimant's original argument regarding the mark to market was inconsistent with those that followed, inasmuch as the mark to market was a clear indicator of the derivative contract's value in monetary terms.
Further, the complainant had appealed against the first-instance judgment as it had rejected its "request for nullity of the contract due to the inadequacy of the IRS in relation to the [complainant's] financial profile". The first-instance court had explained in its judgment that any possible inadequacy may have been detected only "from the point of view of contractual liability" and that it had no impact on the validity of the contract.
The Milan Court of Appeals dismissed the appeal against the Milan Court of First Instance and ordered the complainant to reimburse the legal expenses and fees relating to all phases of the proceedings.
For further information on this topic please contact Manuela Grassi at Ichino Brugnatelli e Associati by telephone (+39 (0)2 48193249) or email (firstname.lastname@example.org). The Ichino Brugnatelli e Associati website can be accessed at www.ichinobrugnatelli.it.
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