I SIGNIFICANT RECENT CASES
i Annual percentage rate of charge
The requirement of the mention of an accurate annual percentage rate of charge (TEG) in a loan agreement is a mandatory feature imposed both to protect the borrower and to promote transparency. The absence or inaccuracy of the annual percentage rate indicated in a loan agreement is a recurring theme raised against banks by borrowers in an attempt to reduce the cost of their loan.
The sanction attached to such irregularities varies according to the type of contract at stake and may consist either in the negation, in full or in part, of the bank’s right to interest, or in the substitution of the – in practice significantly lower – legal interest rate to the TEG. Every year, case law provides for a further development or clarification on the subject.
The Supreme Court recently ruled that, in relation to loans granted to a consumer or a non-professional, the sanction of the inaccuracy of a TEG, resulting from the application of an interest rate based on 360 days rather than the calendar year, is the substitution of the legal interest rate to the TEG.2
The Supreme Court also recently upheld that, in the case of a consumer loan, a mistake in the TEG stipulated contractually needed to exceed at least one decimal point to be sanctioned.3 A first instance court, however, referred a question to the Court of Justice of the European Union for a preliminary ruling, to ask whether French case law allowing for a decimal point mistake was contrary to European law.4 Depending on the Court’s answer, this leniency may or may not last.
ii Indexation clauses
Structured loans have been offered on the French markets to individuals who borrowed an amount in Swiss francs to be reimbursed in euros. In 2015, the Swiss Central Bank ceased to defend the previous 1.20 Swiss franc-euro parity, which resulted in a rise of the cost of the loan for the borrowers. The subsequent disputes have been largely publicised.
The first two decisions of the Supreme Court on the subject were rendered on the same day. The Court ruled on the validity of indexation clauses providing for a revision of the interest rate depending on the variation of the exchange rate between the euro and Swiss franc.5 The Supreme Court considered such clause could constitute an unfair contract term and that the judges therefore ought to examine whether the risk is exclusively borne by the borrower and whether, consequently, the disputed clause has the object or effect of creating a significant imbalance between the rights and obligations of the parties to the detriment of consumers.
The Court of Appeal of Paris has, however, recently changed its position,6 followed by the Supreme Court.7 In these last rulings, the validity of such indexation clauses depends on their clarity and comprehensibility. For example, in the case ruled by the Court of Appeal of Paris, the clarity and comprehensibility of the clause was assessed in light of a notice provided by the bank and that illustrated the consequences of the variation of the exchange rate with quantified examples. The Court concluded that the borrower had therefore been clearly informed of the characteristics of the contract.
This new case law is consistent with the line given by the Court of Justice of the European Union in its case C-186-16 dated 20 September 2017, which considered, in substance, that a loan denominated in a foreign currency and providing for repayment in the same foreign currency is not abusive, provided that the related clauses are drafted in a clear and comprehensible manner.
iii Banks’ duties
The duties of a bank towards its client (to inform, to advise, to warn, to care and not to intervene) are a recurring theme in litigation and recent case law continues to shed additional light on those various duties.
For instance, the Supreme Court recently ruled that a bank did not breach its duty to advise by failing to verify the authenticity of the documents related to its client’s financial capacity, since there were no apparent anomalies.8
In another case, the Supreme Court dealt with the scope of the bank’s duty to advise its client. In principle, a bank granting a loan is not bound by such a duty by mere virtue of the fact that it is lending funds and does not have to judge the appropriateness of the requested credit. Such a duty and related liability may, however, arise where a bank provides specific recommendations when granting a loan. For instance, in a decision dated 7 February 2018, the Supreme Court held that the bank had issued advice insofar as it was at the initiative of the latter, which acknowledged having been aware of the company’s difficulties and the purpose of the loans, that such loans were granted to the borrower in a personal capacity with express stipulation of allocation to the profit of the company.9
iv Statute of limitation
The statute of limitation with regards to the TEG, in the context of a loan agreement entered between professionals, has given rise to abundant case law in recent years.
On the one hand, according to the First Civil Chamber of the Supreme Court, the starting point of the limitation period is either the date of the agreement when examination of its content revealed an intrinsic error or, where that is not the case, the date on which the error is revealed to the borrower.10 On the other hand, the Commercial Division of the Supreme Court adopted a different solution. Indeed, it usually considers that the limitation period should run from the date of the agreement, which was deemed to be the date on which the borrower had known or should have known the defect affecting the TEG.
In January 2017, this difference appeared to be called into question by a decision of the Commercial Division. In the latter case, this Division considered that the starting point was ‘the day on which the borrower had known or should have known the defect affecting the rate’, but without referring to the date of the agreement.11 Some authors had considered this decision to be a reversal.
In a decision dated 4 May 2017, the Commercial Division, however, confirmed its historical position by finding that ‘the starting point of this limitation period is the date of the loan agreement mentioning the allegedly erroneous rate’.12 A professional is supposed to be able to detect the erroneous nature of the TEG as of the day of the loan agreement. This new decision confirms the divergence between the First Civil Chamber and the Commercial Division.
v Banking secrecy
Article 145 of the French Code of Civil Procedure authorises in futurum investigation measures in the context of civil disputes, while Article 11 of the same Code provides for an exception where there exists a legitimate impediment to such measures.
Whereas banking secrecy usually impeded any disclosure of documents or information for purposes of in futurum investigation measures, the Supreme Court recently created a distinction as to whether the bank to whom the request for communication is addressed is taken as a third party, or as a party to the proceedings brought against it. In a decision dated 29 November 2017, the Court made it possible to lift the banking secrecy, in order to determine the liability of the bank in the disputed transaction, when the bank is to be a party to the proceedings on the merits.13
II RECENT LEGISLATIVE DEVELOPMENTS
i Contract law reform14
It is not possible to summarise the entire impact of this reform in the context of this chapter. Nevertheless, the following are some of the innovations that concern the banking sector:
- the reinforcement of the enforceability of unilateral promises that had been undermined by previous case law in comparison to other pre-contractual instruments (offers and pre-emption agreements);
- the introduction, in French contract law, of the notion of unfair contract terms that were only present in specific legislation (consumer law). The possibility to declare such provision null and void is now provided for in the context of standard form contracts and in the case of significant imbalance between the rights of the parties;15
- the introduction of assignment of contracts and debts, and the new provisions on novation and subrogation;
- the exploitation of the other party’s dependence in the context of the entry into the agreement is deemed to constitute an act of duress voiding the agreement under certain conditions (i.e., the party’s state of dependence was the only reason it entered into the agreement and the advantages obtained from the dependent party are manifestly excessive);16 and
- the modification of the frustration of purpose regime, which introduces a possibility for a court, under certain circumstances, after certain steps have been taken and absent contrary provisions, to revise a contract or put an end to it.17
ii Sapin II law
The law known as Sapin II introduced a new legislative framework related to the fight against corruption that will have an impact on the banking and financial sector.18 The law provides for an obligation to put in place internal measures and procedures in order to prevent and detect corruption and trading in influence actions. Eight different types of measures that had to be put into place by 1 June 2017 are: (1) a code of conduct; (2) an internal reporting procedure; (3) risk mapping; (4) evaluation procedures for clients, suppliers and intermediaries; (5) internal and external accounting control procedures; (6) a training system; (7) a disciplinary sanction regime; and (8) an internal evaluation and control system.
The law also creates an anticorruption agency with sanctioning powers (of up to €1 million in pecuniary sanctions) to control compliance with the new obligations and provides for new reporting procedures before the Financial Markets Authority (the financial regulator) and the Prudential Supervision and Resolution Authority (the supervising authority for the banking and insurance sectors) for a lack of compliance with European or French provisions in the financial sector.
The Sapin II law contains a variety of provisions on several different topics. In addition to the above, another subject of interest in the banking sector is the provisions modifying the hierarchy of the creditors of credit institutions in case of winding-up proceedings by creating a new category of bonded debt.19 This modification aims at facilitating bail-in by adding a new class of assets that will absorb the debt and constitute an extra layer of protection for the simple savers. Some banks have already tested this new tool.20
The law was completed by Decree No. 2017-892 dated 6 May 2017 that enacts different measures, among which some provisions related to enforcement proceedings.21
Besides, the law introduced the possibility to conclude a financial settlement, known as a judicial public interest agreement,22 for the benefit of companies that are accused of certain offences,23 as long as the public action has not been initiated.24 The terms and structure of this settlement bear many similarities to deferred prosecution agreements that are entered into in the United States. After approval by the public prosecutor, the proposal is submitted to the President of the District Court (Tribunal de grande instance) for validation.
The first settlement entered into between the public prosecutor and a bank was approved by the District Court of Paris on 14 November 2017, under which the bank agreed to pay a total of €300 million to settle offences relating to money laundering and tax evasion.25
In June 2018, another bank also entered into a judicial public interest agreement with the French prosecution authority that puts an end to the latter’s investigations into transactions involving Libyan counterparties. As part of this settlement, the bank has agreed to pay penalties totalling approximately €250 million. The bank has also committed to ensuring that its internal policies, procedures and controls are designed to prevent and detect violations of the relevant anti-bribery laws.26 A similar agreement has been entered into with the US Department of Justice. This is the first coordinated resolution between US and French authorities in a bribery case.
iii Recent regulatory texts
A number of regulatory texts adopted in 2017 and 2018 had an impact on the banking sector, notably:
- Law on the reform of contract law and the general regime and proof of the obligations, which ratifies Order No. 2016-131 dated 10 February 2016;
- Order No. 2017-1674 dated 8 December 2017 allowing the use of blockchain for title transfers;
- Decree No. 2017-1094 dated 12 June 2017 and the related Decree No. 2018-284 dated 18 April 2016 relative to beneficial owners, which compels registered legal entities to file a document regarding their beneficial owners, and therefore allows for determination of who ultimately controls said legal entity;
- Decree No. 2017-892 dated 6 May 2017 providing for diverse measures of modernisation and simplification of civil procedure; and
- Decree No. 2017-888 dated 6 May 2017 relative to class action provided for in Law No. 2016-1547 dated 18 November 2016 on the modernisation of justice in the 21st century.
III CHANGES TO COURT PROCEDURE
i Appeal procedure reform
A recent decree modified the rules relative to proceedings before the courts of appeal.27 Most rules of the appeal procedure reform apply to rulings or appeals lodged after 1 September 2017. The new rules in particular simplify challenges to jurisdiction, refocus appeal proceedings on the criticism of the first instance judgment, introduce strong concentration principles, regulate procedural delays and require greater formalisation of acts.
ii International aspects of recent procedural changes
Another recent decree brought several changes to various procedural issues,28 including the reform of the regime of international letters rogatory in several aspects. The most interesting change relates to the possibility for a foreign judge to directly carry out (via videoconference) the hearing of a person it requested, concerning letters rogatory delivered under The Hague Convention and under certain circumstances.29 In addition, it institutes the exclusive jurisdiction of the District Court and provides for the existence of a special judge in charge of supervising the execution of the letters rogatory.
An international chamber has recently been created within the Court of Appeal of Paris.30 It has jurisdiction to rule on appeals of decisions delivered in international commercial disputes, and in particular disputes that involve provisions of European or foreign law. In this respect, it is sufficient that one of the parties is a foreign entity or that a foreign law is applicable to trigger the special chamber’s jurisdiction. The chamber’s jurisdiction may also result from a jurisdiction clause.
The English language can be used during the proceedings. Even if pleadings and judgments are still drafted in French, documents in English may be filed without translation and judgments are translated under the responsibility of the court’s registrar. In addition, if the proceedings are to be held in French, simultaneous translation by a translator appointed by the court may be arranged. Parties appearing before the judge, witnesses and technicians, including experts, when they are foreigners, may speak English if they so wish.
Moreover, the possibility to use certain mechanisms akin to those of common law, such as cross-examinations, appears to have been introduced in theory. Their practical implementation, however, remains to be seen in practice.
iii Class action
Following the introduction in 2014 of the French equivalent of the class action, note that, of the 12 actions initiated since then, several concern the banking sector. For instance, in March 2018, an action was filed against Natixis, following a fine imposed by the Enforcement Committee of the French Financial Markets Authority.31
IV INTERIM MEASURES
The only major recent change in relation to interim measures concerns proceedings relating to assets belonging to foreign states. Sapin II, the anti-corruption law,32 introduces several provisions regarding enforcement proceedings – including interim measures – against assets belonging to a foreign state located on French soil, partially codifying the previous regime. The law introduces a prerequisite according to which provisional and enforcement measures against an asset belonging to a foreign state now require a prior judicial authorisation.33 The law codified the following scenarios in which such measures are possible: (1) the state expressly consented to the application of such measure; (2) the state allocated or earmarked the property for the satisfaction of the claim that is the object of the proceedings; and (3) where a judgment or an arbitral award was rendered, the property is specifically in use or intended for use by the state for purposes other than government non-commercial and it has a connection with the entity against which the proceeding was directed. Moreover, the new Article L.111-1-3 of the Code of Civil Enforcement Proceedings clarifies the conditions under which a state can waive immunity from execution on property necessary to the diplomatic activity. This new Article supersedes the latest case law,34 which abandoned the requirement that the waiver be specific (i.e., that it established the list of the goods susceptible to be seized).35
V LAWYER–CLIENT PRIVILEGE
i Definition and scope
The relationship between a lawyer (admitted to the local Bar) and his or her client is protected by the general professional secrecy obligations set out in Article 226-13 of the Criminal Code that prohibit a professional who is subject to a secrecy obligation from divulging information obtained from the client. The client is not, however, bound by this secrecy obligation. In addition, Article 66-5 of the Law of 31 December 1971 on the status of lawyers provides that any written communication addressed by a lawyer to his or her client (correspondence, meeting notes and generally all documents forming part of the client’s file) and by a lawyer to another lawyer in relation to a matter handled on behalf of a client, are protected by professional secrecy (unless expressly indicated to the contrary in the latter case). A client cannot release his or her lawyer from the obligation to keep all of these documents confidential.
ii In-house lawyer
The concept of in-house lawyer privilege is not recognised in France. In-house lawyers may not retain their lawyer status and they may not represent their employers in proceedings where representation is compulsory.
iii Application by the courts and public authorities
In civil and commercial matters, the doctrine of privilege is binding and respected by regulatory and other investigative bodies. Regulatory bodies (e.g., competition and financial authorities) cannot order the production of, or rely upon, documents protected by professional secrecy while investigating and carrying out checks.
In criminal, customs and tax matters the position is slightly different. In theory, documents protected by professional secrecy cannot be seized during searches conducted by the investigating magistrate. Nor can they be removed by regulatory and public bodies (competition and financial authorities, customs and tax) when they undertake court-authorised premises searches. Documents may only be seized when the search is intended to collect evidence of a criminal offence or certain customs and tax offences. This prohibition of seizure extends to lawyer–client communications held at the client’s premises.
The Code of Criminal Procedure sets out one exception to the rules on professional secrecy in relation to lawyers’ documents and objects (such as mobile phones, laptops, etc.). They are no longer protected by professional secrecy when they are seized as evidence of a lawyer’s commission of a criminal offence or certain customs and tax offences. If the seizure is made at the domicile or office of a lawyer the search may only be carried out by a judge and the Head of the Bar Association, or his or her delegate must be present during the search. In addition, the Criminal Chamber of the Supreme Court reconfirmed the distinction drawn between documents relating to the exercise of the defence rights and documents relating to the drafting and negotiating activities of a lawyer; documents that are not related to the exercise of defence rights can be seized if it is necessary for ascertaining the truth and on condition that the breach of professional confidentiality is strictly proportionate.
Finally, as a result of a recent law,36 the access to and the copying of a lawyer’s electronic mailbox can be authorised by a specialised judge, following a simple notification to the President of the Bar, for the purposes of an inquiry relative to organised crime offences if the lawyer is suspected to have taken part in the offence. In addition, the new provisions specify that the fact that the authorised operations revealed offences different from those identified in the judge’s authorisation does not constitute a reason to invalidate incidental proceedings.
VI JURISDICTION AND CONFLICTS OF LAW
The Supreme Court recently decided to extend an arbitration clause to a banker who was not a signatory of the clause, but became, through a factoring agreement, the owner of the receivables held by one of the signatories of the arbitration clause.37 An author recently noted in this respect that ‘in practice, it will be almost impossible for a bank which acts as a transferee bank for the benefit of its client to avoid the arbitration clause contained in the commercial contracts from which the receivables transferred to it (through a factoring agreement or a “Dailly Assignment”) originate’.38
Besides, the Supreme Court confirmed that French texts governing banking secrecy were applicable in the context of bankruptcy proceedings governed by Cayman Islands law. The Court considered that the mission of the liquidator of the Cayman Islands, applicant at hand, was similar to that of French liquidators, and as a consequence that French rules regarding suspension of banking secrecy could apply, the bank in case being established in France.39
VII SOURCES OF LITIGATION
The current main sources of litigation against banks have been outlined in Section I, above. Ongoing litigation involving banks notably revolves around the compliance of banks with their various duties in the context of loans or commercialisation of financial products. Other subjects that remain topical are the interest rate, as well as validity and enforceability of a guarantor’s undertakings.
VIII EXCLUSION OF LIABILITY
Limitation of liability clauses are not enforced in case of wilful misconduct or gross negligence. The order reforming French contract law40 codified a further exception to the validity of exemption clauses previously developed by case law. The new Article 1170 of the Civil Code provides that contract terms that deprive a debtor’s essential obligation of its substance is deemed null and void. An exemption clause should not make the execution of the contract meaningless. This means in practice that the clause should not establish a liability threshold so high that it would in fact never be reached and should not fix a compensation too low. This situation will be assessed by French courts on a case-by-case basis.
As for previous case law, there is the question of what use could be made of the above provision against investment banks in the context of M&A deals. It is typical for a client to hold harmless an investment bank against any action that a third party may initiate against the bank in relation to a deal. In relation to limitation of liability clauses this coverage is typically excluded in case of wilful misconduct or gross negligence of the bank. It is arguable that, in certain circumstances, Article 1170 of the Civil Code could apply to this warranty as well.
IX REGULATORY IMPACT
The proliferation of norms in the banking and financial sector bears the correlative risk for banks of new litigation based upon their lack of compliance with such regulations. Banks are subject to an increasing number of obligations relative to anti-money laundering and terrorist financing. In particular, suspicious transactions must be reported to Tracfin.41 In a recent decision of the Prudential Supervision and Resolution Authority, a bank was given a €5 million administrative fine considering the time taken by the latter to report suspicious transactions, the lack of internal control within the bank and the failure to report some transactions.42
X LOOKING AHEAD
No major French laws concerning the banking sector are currently expected.
A piece of draft legislation is being prepared that provides for the removal of the mandatory mention of the annual percentage rate of charge in the loans to professionals.43 It also seeks to clarify and standardise the sanctions regime in case of absence or inaccuracy of the TEG in a consumer loan.
In addition, France seeks to endorse a legislative framework for the use of blockchain and will be the first European country to do so. Indeed, an order has already been passed to allow the use of blockchain for securities transfers.44
1 Arnaud de La Cotardière and Jean-Charles Jaïs are partners at Linklaters LLP. The authors are grateful to Hubert Delerive for his research and assistance in the preparation of this chapter.
2 Cass. Com., 29 November 2017, No. 16-17.802.
3 Cass. Com., 18 May 2017, No. 16-11.147.
4 Limoges First Instance Court, 11 October 2017, No. 17-000561.
5 Cass. Civ. 1, 29 March 2017, Nos. 15-27.231 and 16-13.050.
6 Paris Court of Appeal, 6 October 2017, No. 16-03076.
7 Cass. Civ. 1, 3 May 2018, No. 17-13.593.
8 Cass. Civ., 1, 5 July 2017, No. 16-17.103.
9 Cass. Com., 7 February 2018, Nos. 16-12.808 and 16-24.004.
10 See, for a recent example, Cass. Civ. 1, 1 March 2017, Nos. 15-16819 and 16-10270.
11 Cass. Com., 31 January 2017, No. 14-26.360.
12 Cass. Com., 4 May 2017, No. 15-19.141.
13 Cass. Com., 29 November 2017, No. 16-22.060.
14 Order No. 2016-131 dated 10 February 2016 on the reform of contract law, and of the general regime and proof of the obligations. The new law entered into force on 1 October 2016 and was ratified on 20 April 2018 by Law No. 2018-287, which will enter into force on 1 October 2018.
15 Article 1171 Civil Code: ‘Any term of a standard form contract which creates a significant imbalance in the rights and obligations of the parties to the contract is deemed not written. The assessment of significant imbalance may not concern neither the main subject-matter of the contract nor the adequacy of the price in relation to the act of performance.’ Standard form contracts are defined at Article 1110 of the Civil Code as follows: ‘A standard form contract is one whose general conditions are determined in advance by one of the parties without negotiation.’
16 Article 1143 Civil Code: ‘There is also duress when one contracting party exploits the other’s state of dependence and obtains an undertaking to which the latter would not have agreed in the absence of such constraint, and gains from it a manifestly excessive advantage.’
17 Article 1195 Civil Code: ‘If a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who has not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract. The first party must continue to perform his obligations during renegotiation.
In the case of refusal or the failure of renegotiations, the parties may agree to terminate the contract from the date and on the conditions which they determine, or by a common agreement ask the court to set about its adaptation. In the absence of an agreement within a reasonable time, the court may, on the request of a party, revise the contract or put an end to it, from a date and subject to such conditions as it shall determine.’
18 Law No. 2016-1691 dated 9 December 2016 relative to transparency, fight against corruption and modernisation of the economic life.
19 Article 151 Sapin II law, modifying Article L.613-30-3 of the Monetary and Financial Code.
20 ‘French banks test the ‘Sapin II’ debt’, Les Echos, 15 December 2016.
21 See Section IV, below.
22 Convention judiciaire d’intérêt public.
23 Such as bribery or influence peddling offences, as well as tax laundering offences.
24 Article 41-1-2 Code of Criminal Procedure.
25 District Court of Paris, 14 November 2017, No. PNF 11 024 092 018.
26 District Court of Paris, 24 May 2018, No. PNF 15 254 000 424.
27 Decree No. 2017-891 dated 2 August 2017 amending the terms of entry into force of Decree No. 2017-891 dated 6 May 2017 relative to the lack of jurisdiction pleas and appeal in civil matters; Circular No. JUSC1721995C dated 4 August 2017 presenting the provisions of this Decree.
28 Decree No. 2017-892 dated 6 May 2017 adopting various measures of modernisation and simplification of civil procedure.
29 New Article 747-1 Code of Civil Procedure: ‘If it is requested in the rogatory letter, and as far as the measure of inquiry solely provides for a hearing, the Ministry of Justice can authorise its direct performance by the foreign court, notably via videoconference, without any possible constraint or penalty.’
30 Protocols relating to proceedings before the International Chamber of the Court of Appeal of Paris and First Instance Court of Paris dated 7 February 2018.
31 Enforcement Committee, 25 July 2017, SAN-2017-07.
32 See Section II.ii, above.
33 Article R.111-1 Code of Civil Enforcement Proceedings.
34 Cass. Civ. 1, 13 May 2015, No. 13-17.751.
35 On this subject, see J Heymann, JCP G No. 5, 30 January 2017, 102, who notably questions the conventionality of the new judicial authorisation prerequisite and of the necessity of an express and specific waiver of immunity from execution for diplomatic property.
36 Law No. 2016-731 dated 3 June 2016 reinforcing the fight against organised crime, terrorism and their financing and improving the efficiency and the guarantees of criminal procedure.
37 Cass. Civ. 1, 13 September 2017, No. 16-18178.
38 J Morel-Maroger, Banque & Droit No. 177, January–February 2018, p. 38.
39 Cass. Com., 29 November 2017, No. 16-22.060.
40 See Section II.i, above.
41 Tracfin is a public agency that fights against illegal financial circuits, money laundering and the financing of terrorism.
42 Enforcement Committee of the Prudential Supervision and Resolution Authority, 19 July 2017, No. 2016-07.
43 Draft Law for a State at the service of a society of trust, adopted by the National Assembly and the Senate at first reading on 20 March 2018, but returned to the National Assembly for a new reading owing to a disagreement within the Joint Committee.
44 Order No. 2017-1674, 8 December 2017, JO 9 December 2017.