This content is from: Local Insights

The effect on derivatives transactions of annulment of authorisations by territorial entities

The regional administrative tribunal in Tuscany (TAR) recently rendered a judgment – No. 6579 of November 11 2010 – on an issue which is gaining importance in Italy: the exercise by territorial entities (municipalities, provinces and/or regions) of the power to annul resolutions taken by them authorising the entering into of derivative transactions and the consequences of an annulment on derivatives transactions entered into on the basis of such prior authorisations.

The power of annulment of unlawful public decisions (for example resolutions and authorisations) by territorial entities is allowed under Italian law provided that certain conditions are met. This is known as self-protection by territorial entities.

The territorial entity involved in the judgment in question (a province) has declared void the authorisations approved by it in respect of derivatives transactions entered into with two banks on the basis of such authorisations. As a consequence, it has considered such derivatives transactions automatically ineffective and non-binding between the parties.

The claim of the territorial entity is based on a previous interpretation given by Italian administrative courts according to which the annulment of authorisations renders contracts entered into by territorial entities on the basis of such authorisations automatically ineffective.

More recent judgments rendered by Italian courts, and followed by the TAR in the November judgment, however, state that the annulment of authorisations does not produce any effect on contracts entered into by the relevant territorial entity on the basis of such authorisations. Only the competent judge, in fact, has the power to declare a contract ineffective as a consequence of the annulment of the relevant authorisations.

According to the TAR, no one, including territorial entities, may resolve a contract without the consent of the counterparty since the relevant claim needs to be filed before the competent judge who has the power to decide on the effectiveness of contracts. As a consequence, notwithstanding the annulment of the relevant authorisations, derivatives transactions entered into by territorial entities on the basis of such authorisations should remain valid and binding between the parties until a contrary decision by the competent judge.

However, November's judgment does not cover an important issue: the exact identification of the competent judge given that the courts chosen by the parties under the derivatives transactions (entered into under Isda (International Swaps and Derivatives Association) master agreements) are English courts. For its own part, the court in England, before which an action has been already filed by the banks involved in the judgment, has now declared its competence to rule on the case.

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