I Significant recent cases

Banking law in Spain has not changed much over the past couple of years; we have had no recent legislative reforms apart from implementing the relevant EU Directives applicable to all Member States. However, there have been some highly significant judicial decisions that have shaped the banking litigation landscape. In particular, there is one decision regarding an institutional investor’s multimillion claim against a bank in relation to its initial public offering (IPO)2 that has had repercussions and implications for banking litigation in Spain. In view of its significance, we have focused on this decision and analysed the grounds of the judgment in depth because it establishes the path of eventual claims on the IPO of the bank. For this reason, the structure of this chapter differs from others in this publication; where we have not commented on a particular area that other jurisdictions have addressed it is because there is no recent decision of any importance on that topic in Spanish law.

Just a few weeks after the hearing in which the institutional investor in Spain (the ‘institutional investor’) was suing a Spanish financial institution (the ‘bank’) for the money it lost when investing in its IPO, the court decided in favour of the bank.

Although the judge, José Ramón Manzanares Codesal, considered that the accounts with which the bank made its debut on the markets were not accurate, he dismissed the claimant’s petition for compensation of the €12 million lost of its initial investment of €70 million, and ordered it to pay legal costs.

The judge considered that the institutional investor had not been able to prove that the bank’s accounts were crucial to its decision to invest in the bank’s shares, and that the error in consent claimed by the institutional investor when entering into the legal transaction, although of an essential nature, was not excusable.

The judge’s decision is based fundamentally on the position set out by Spain’s Supreme Court at the start of 2016 regarding claims filed by retail investors against the bank.3 In those proceedings, the Supreme Court already held that the bank’s accounts did not reflect reality and forced it to refund money to the retail investors.

As the highest court had made a causal link between the bank’s false accounting and the essential and excusable nature of the error by investors in general and retail investors in particular, it would appear that the institutional investor’s claim should have been received favourably. However, in the process of making the decision, the judge took into consideration a legal concept referred to by the Supreme Court, which is that of ‘access to another kind of supplementary information’, and the institutional investor appears to have had information that fell within that concept.

Additionally, the judgment states that the claimant received various warnings of ‘insecurity and uncertainty’ at the bank in the form of downgraded credit ratings by ratings agencies in the days before it was floated on the stock market. Factors that, although made public, are not ‘feasible’ for retail investors to consult but that the institutional investor was aware of, ‘despite which, days later, it decided to acquire almost €70 million in shares’.

In other words, in view of Judge José Ramón Manzanares Codesal, the Supreme Court made it clear that the inaccuracy of the prospectus harmed private small retail investors because they did not have the analytical tools of a large investor, which would be the case for the institutional investor.

The ruling also means a respite for the bank, which was facing the first action brought by a major company, and makes it less likely that it will have to pay out similar compensation to that already paid to retail investors, who had contributed a further €1.8 billion.

In Section II, below, we will analyse the judgment at the Court of First Instance 89 of Madrid in depth in connection with the Supreme Court ruling regarding the same case but applying to retail investors.


i The relief sought by the parties

The institutional investor requested the ‘annulment, due to error invalidating its consent, of the two orders of subscription formulated by the Institutional Investor’ as well as ‘the annulment of the subscription contracts of shares’. Finally, there is a request for payment of the loss suffered on the investment (€12 million), as well as a request for payment of interest and costs.

The bank pleaded for the dismissal of all the petitions raised by the institutional investor.

ii Preliminary issues
The action brought by the claimant

In the case at hand, the following categories of ineffectiveness of legal transactions and agreements recognised in the Spanish legal system are identified:

  • a absolute nullity and voidance when a legal provision is contravened (Article 1301 Civil Code (CC)); and
  • b annulment or relative nullity if a relevant defect is incurred (usually invalid consent) but there is no contravention of a legal provision or lack of an essential element (Article 1300 CC).

The institutional investor asked for the annulment of a contract with termination effects.

Absence of ad causam standing to sue the alleged by the bank because of the sale of the shares by the institutional investor and the subsequent loss of object

The bank alleged that once the institutional investor sold the shares there was no claim to be brought regarding a legal transaction that no longer existed.

The judge stated that the sale of shares by the institutional investor was sufficient evidence to question the occurrence of the causa petendi. According to the Spanish procedural system, claims are based on the occurrence of two elements: petitum or relief sought (i.e., what the claimant is asking for); and the causa petendi, which are the facts and legal arguments that support the claimant’s petitions. Judges are bound by the petitum (the judgment must refer to all the petitions made in order to be consistent and should not refer to fewer petitions, more petitions or different petitions than the ones made by the parties) and the facts raised by the parties but not by the legal arguments. This means that the judge may decide about the facts from the standpoint of the different legal arguments or case law applying the principle of iura novit curia (‘the court knows the law’).

The judge argued that, once a legal transaction is extinguished, it seems reasonable that its extinction cannot be declared or constituted again. Therefore, neither absolute nullity nor relative nullity can apply, since there is no contract to undo and the act that the institutional investor says is invalid no longer exists. In short, it is not possible to identify a legal transaction that (still) exists and has effect, and it is also not possible to terminate that legal transaction.

However, because there is no prior ruling in this regard from the Court of Appeal of Madrid or the Supreme Court, the judge dismissed the argument of lack of legal standing to sue raised by the bank.

Expiration of the action

The bank argued that the action brought had already expired.

In this regard the judgment contained a detailed study of the four-year expiration period of the action brought by the institutional investor.

The first day of the limitation period for bringing action for error in consent is when the contract is consummated. To specify the time when the investment contracts are consummated, reference is made to Supreme Court case law, which provides that the consummation of the contract, in order to determine the first day of the limitation period for bringing the action, cannot be fixed before the customer has been able to become aware of the existence of the error or misconduct.

Thus, the first day of the limitation period for bringing the action against the bank was, therefore, the suspension of payment of benefits or accrual of interest, the application of measures of management of hybrid instruments agreed by the Fund for Orderly Bank Restructuring, or, in general, any other similar event that allows for real knowledge of the characteristics and risks of the complex product acquired through erroneous consent.

The events in the case at hand, by virtue of the publicity they were subject to, could not go unnoticed by a qualified or professional investor. It is considered, with certainty, that the institutional investor was aware of the situation that affected the bank’s shares on 25 May 2012. Consequently, the lawsuit was filed before the day that the deadline for filing the action expired, which was 9 May 2016.

The expiration defence raised by the institutional investor was dismissed.

iii Grounds and material legal arguments of the case

The core of the judgment contains a study of the error in consent as traditionally applied by Spanish courts and the current approach to erroneous consent in financial contracts given by the Supreme Court in Spain in the past few years as a result of the raising of these sorts of claims because of the global financial crisis.

Classic approach to the error in consent in case law and legal scholars’ opinions

The annulment referred to in Article 1300 CC corresponds to the nature of relative nullity, which, referring to the classical doctrine, proceeds by error when the fundamental understanding of the contract is wrong.

In order to make the consent invalid, the error has to fall on the substance of the thing that constitutes the object of the contract, or on the conditions that would have given rise to it (Article 1266 CC). The erroneous circumstance must have been taken into consideration at the time that the contract was finalised.

As the party was bound by the burden of proof, the institutional investor was considered to have been unable to prove in a legally effective manner that the accuracy and certainty of the bank’s accounts were essential elements, first to form its knowledge about the circumstances of the legal transaction, and after to form its will to consent to that legal transaction.

In the judge’s view, neither the expert witnesses nor any of the other witnesses supported the notion that the bank’s accounts were an essential factor for the institutional investor to acquire the shares, as the Court of First Instance deemed that it was clear that the bank’s accounts did not fall into the category of main cause to subscribe for the shares but was only an important factor.

The judge understood that the criteria shown to have been crucial for the legal transaction was profitability.

Since the error is not fundamental, the claim should be dismissed, making it unnecessary to analyse the rest of the requirements concerning the error in consent.

But this conclusion is partial, reached only under the classic approach to error in consent in case law and legal scholars’ opinions, and it is not the conclusion of the judgment.


The most interesting part of the judgment is the analysis of the recent case law of the Supreme Court, taking into consideration the absence of High Court rulings on qualified or professional investors. And, specifically, the analysis of the changes that have been applied exceptionally to financial contracts with retail investors.

i Arguments applied in retail investors’ contracts

Since 2013 the theory of legal transactions has been modified on an exceptional basis when applied exclusively to financial contracts. In particular, modifications affect four elements of financial contracts:

  1. the assimilation of the error in the consent with the lack of representation or insufficient representation, releasing the investor from liability and transferring that liability to the financial institution;
  2. the non-fulfilment of obligations of financial institutions that has become an essential assumption in the psychological or intellectual consent of investors;
  3. the individualised or tailor-made examination of the essential nature of the error in consent (case by case) has yielded to generalised assumptions; and
  4. if the financial institution has not proved that it has fulfilled its duties, among which is to offer real and accurate information, and the investor breaches those duties, it has to be deemed that the duties were not fulfilled.

The analysis of these modifications and evolution of the assumptions regarding financial contracts makes it possible to understand the considerations that the Supreme Court would reach in the case at hand, where the investor was undoubtedly qualified and professional.

Error in consent: forming the will (lack of representation or insufficient representation)

Although traditionally the Supreme Court had distinguished between error in consent (as a false judgement about the object to which the consent was given) and lack of representation (as a lack of acknowledgment of essential elements in the legal transaction), this difference does not exist when retail investors are involved.

As a rule, the intellective side of the investor’s consent was strictly subjective and the fulfilment of obligations by the financial institution was objective. Now, the fulfilment of the obligations by the financial institution is no longer objective and depends on the characteristics of the retail investor.

In summary, the retail investor is not expected to contract with minimum diligence (the diligence of a ‘good family head’); the retail investor is not expected to have studied the contract before signing it even though the clauses of the contract might be clear, simple, concrete and directly comprehensible; and retail investors do not even have to have read the information prospectus received (Supreme Court judgment of 3 February 2016 (Ruling No. 24/2016)).

Duties and obligations of the financial institutions

The Supreme Court has defined the wide scope of the obligations of information that financial institutions are bound by. Such obligations are:

  1. information about the financial product that is the object of the legal transaction and related products so that the retail investor is able to choose mindfully and is aware of his or her choice;
  2. information about the risks of each speculative operation;
  3. information about strategies of investment;
  4. information about orientation concerning the financial products and its strategies; and
  5. warnings affecting those financial products and strategies.

Some rulings also include the presumption of the occurrence of the error in consent if the financial institution has not shown regard for the investor’s interests or, further, has not prioritised the investor’s interests in case of conflict against its own.

According to the Supreme Court, those duties are a consequence of the asymmetry or imbalance between the information available for a financial institution and the information available for a non-experienced retail investor. The need to protect the retail investor justifies the high standard of information required from the financial institution.

In accordance with securities market regulations (recently reformed in Spain) when financial advice is given, the financial institution should obtain information about the investors in the pre-contractual phase. Only when the financial advice is given to a qualified or professional investor will it be possible to assume that the client has the background and experience needed to understand the investment. The breach of those obligations entails the liability for the damages that investors may suffer.

Essential nature of the error in consent case by case

In the framework of interpretation following the recent judgment, the occurrence of the essential nature of error is presumed when the above-mentioned obligations of the financial institution are breached.

The Supreme Court judgment of 3 February 2016 establishes that the inaccuracies in the information provided by the bank’s accounts that are related to the devaluation of its shares removed any expectation of profitability for the retail investors.

Therefore, there is no reason that prevents the application of this consideration to extend to qualified or professional investors.

Obligations breached by the financial institutions

When the investor whose expectations of profitability have not been met argues that the financial institution did not fulfil its obligations, whether the financial institution chooses not to prove that it has complied with those obligations or if it does not because it is impossible (i.e., because of the retirement or death of employees who took part personally in the legal transaction with the client or because the witness from the financial institution is not able to remember clearly and with minimum certainty what happened years ago), courts consider that these obligations have not been fulfilled.

It is clear that financial institutions should be able to prove that the obligation of information was fulfilled. The lack of evidence cannot adversely affect the claimant as that would infringe the principle of ease of access to evidence.

ii The acquisition of shares by the institutional investor

The analysis carried out in the preceding paragraphs is intended to clarify the key facts that resolved the case.

The institutional investor (like most retailers who have filed lawsuits against the bank) grounds its error in consent essentially on the mismatch between the bank’s accounting and the reality at the time when the institutional investor made its investment.

Considerations made by the Supreme Court regarding the bank’s accounts at the time of the IPO

Since 2012, there has been a criminal procedure in Spain in which the possible criminal consequences of a forgery of the bank’s accounts is being examined (misrepresentation of accounts is a crime under Article 290 of the CC).

The existence of a criminal procedure on a particular issue that has an impact on a civil procedure entails the adjournment of that civil procedure until a judgment is handed down in the criminal procedure, as a result of a pending ruling. This would mean the adjournment of the case until there was a ruling on the criminal proceeding regarding the bank’s accounting.

However, the pending ruling in a criminal procedure has recently been subject to review by the Supreme Court, no doubt in order to avoid delays caused by adjournments (criminal proceedings usually take longer than civil) and for the reason that the pending ruling could be unnecessary for the assessment of the case. In this regard, the Supreme Court judgment of 3 February 2016 establishes that as the above-mentioned forgery is not material but ideological in nature, the criminal decision about the facts investigated will not have a decisive influence on the resolution of the civil procedure. The assessments respond to different parameters in the criminal and civil procedures. In terms of probative value, a higher standard of proof is required in criminal proceedings than in civil proceedings.

In the case at hand, the expert report provided by the institutional investor was solid in the evidence that the bank’s accounts showed inconsistencies with the reality at the time of the IPO. Therefore, for the purposes of judgment of the case, the bank’s accounts at the time of the IPO should be considered forged.

The information about the accounts available to the institutional investor: essential nature of the error in consent

Further to the analysis of the case law in the preceding paragraphs applying to retail investors, it is possible to conclude that the protection given by courts to retail investors was justified for two reasons: (1) the lack of financial knowledge; and (2) the forged accounting of the bank.

Focusing on the second issue, the same protection should apply to qualified or professional investors who also made their investment decision based on forged accounting.

In this regard, the main difference between the information considered by the institutional investor and the information considered by retail investors at the time when the decision to invest was made affects complementary reports from financial experts who took into account many economic factors (e.g., interactions, effects, calculations). Those complementary reports made it easier for the institutional investor to have a superior global knowledge of the legal transaction than that available to retail investors, but not in relation to the bank’s accounting, to the extent that the institutional investor, having such information that included, for example, the low acceptance of the bank’s shares from foreign investors, sold part of its shareholding package to minimise losses and made the investment anyway.

Therefore, taking into consideration that (1) the bank’s accounting was declared forged according to civil law (although not, as yet, from a criminal perspective), (2) the bank registered data in the Commercial Registry that did reflect the real data, (3) the bank’s accounting was considered an essential element of the investment, and (4) the institutional investor did not have access to accounting information other than that provided by the bank, the institutional investor made an error in its consent that was of an essential and apparently excusable nature.


Originally, it would seem that the institutional investor’s claim was well grounded and should have been upheld by the first instance court. However, as explained in the introduction, the claim was dismissed. The reasons why are outlined below.

The last part of the judgment starts by referring to another judgment of the Court of Appeal of Madrid (Chamber 14a) dated 21 December 2016, which is one of the few rulings on the bank’s IPO regarding qualified or professional investors.

The judgment of the Court of Appeal of Madrid shares the arguments put forward by the Supreme Court in the judgment of 3 February 2016 on the essence of the error in consent, but concludes that the error is inexcusable. According to the Court of Appeal’s ruling, the requirement of excusability of the error cannot be assessed for three reasons. In brief:

  1. There is a difference between retail investors and qualified or professional investors. Retail investors only have the prospectus as a means of obtaining information on economic data that affect the company whose shares are listed. Qualified or professional investors may have access to other supplementary information. It is a question of determining whether, based on that supplementary information regarding the bank’s IPO in July 2011, the institutional investor’s error was excusable.
  2. The bank had lots of investments in the real estate sector and the deterioration of the real estate sector was already known in July 2011 – this could not go unnoticed by the institutional investor, which had to be aware that such exposure to the real estate market could significantly affect the value of the shares.
  3. The regulatory filings made by the bank to the National Securities Market Commission meant that the bank’s credit rating was downgraded by the rating agencies before the institutional investor subscribed for the shares.

However, in accordance with the judge, these arguments show inconsistencies. The access to supplementary information was not relevant in the case at hand as it has been shown that such information did not provide any data to prove that the accounts were forged.

Additionally, regarding the bank’s investments in the real estate sector, such information was also available for retail investors. It cannot therefore be considered as supplementary information only available to qualified or professional investors. In any case, it has not been possible in the proceeding to prove that such exposure to the real estate sector could potentially affect the value of the shares or that such exposure actually affected the value of the shares.

Given that the Supreme Court causally linked the forged accounting of the bank with the essentiality of the error and with its excusability in general, everything would indicate that the claim should have been successful.

However, the judgment is based on a new concept introduced by the Supreme Court, which lacks a clear legal definition, called ‘access to another kind of supplementary information’, which it would appear the institutional investor did have: the two rating downgrades made by international ratings agencies that the bank received were prior to the double acquisition of shares made by the institutional investor, and neither of these two downgrades was known to the retail investors of the judgment of 3 February 2016.

Thus, the judge deemed that the institutional investor had two warnings of insecurity and uncertainty regarding the situation of the bank despite which, days later, it decided to acquire shares worth €70 million.

In conclusion, the judge stated that having made such an investment after weighing up the judgements of specialised agencies that recommended caution and in application of the Supreme Court concept of ‘access to another kind of supplementary information’, the court decided that there were no grounds to uphold the petition for annulment made by the institutional investor in order to recover 18 per cent of its investment. The claim was therefore dismissed.

We expect that the ruling will be appealed before the Court of Appeal of Madrid (and probably, considering the amount in dispute, also before the Supreme Court), so the judgment may change. Nevertheless, the considerations made by the judge and the in-depth analysis of the evolution of the error in consent regarding qualified investors are laudable.

1 Borja Fernández de Trocóniz is a partner and Emma Morales Mata is a managing associate at Linklaters SLP. The information contained in this chapter is accurate as of August 2017.

2 Ruling No. 70/2017 issued by Court of First Instance 89 of Madrid, Ordinary Proceedings 500/2016, dated 17 March 2017.

3 Ruling No. 24/2016 issued by the Supreme Court in plenary session, Roll of Appeal 140/2015, dated 3 February 2016.