Litigation in Portugal involving banks has increased dramatically in the past decade. This is not surprising in light of the 2008 financial crisis and the subsequent generalised defaults on loan agreements. However, in Portugal there were other major contributing factors for this increase. In 2011, Portugal required financial assistance. In 2014, one of the biggest Portuguese banks – Banco Espírito Santo – became unexpectedly insolvent among suspicions of serious fraud and was subject to the first banking resolution measure in Europe, from which a supposedly good bank emerged (Novo Banco). Nevertheless, this caused losses to thousands of shareholders and bondholders who were left with assets held in the bad bank. In 2015 the biggest telecom group – Portugal Telecom – was acquired by the Brazilian telecom group Oi, which then became insolvent the next year and was later sold to the French group Altice, but with the exclusion of the bonds that had been issued, also causing losses to bondholders. In late 2015, Banif, a bank with a market share of around 30 per cent on the islands of Madeira and the Azores, become insolvent, was also subject to a resolution measure, and the majority of its assets – but not subordinated bonds – were sold to Banco Santander Totta, also causing significant losses to investors. Consequently, thousands of civil lawsuits were filed against banks and their directors, seeking compensation for damages. These claims are generally based on mis-selling and the breach of duties of information.
Since 2011 the government has injected more than €4 billion into the state-owned bank Caixa Geral de Depósitos. This led to two parliamentary inquiries, during which the existence of several loans of hundreds of millions of euros granted under dubious conditions became public knowledge.
Taking all this in consideration, it is fair to say that at present banks in Portugal are not enjoying the best reputation. Yet another blow was recently dealt by the Portuguese Competition Authority, which imposed a record-breaking fine of more than €200 million on 14 banks for having carried out an anticompetitive concerted practice. The Portuguese Association for Consumer Protection (DECO) has already announced that it is studying the possibility of claiming damages.
ii SIGNIFICANT RECENT CASES
There is an ongoing debate as to whether, in enforcement proceedings, debtors may try to compensate the debt with a counterclaim. This was often attempted by debtors against banks and when the discussion on the counterclaim was accepted this usually significantly delayed the satisfaction of the banks' claim. The Supreme Court adopted a restrictive interpretation in its jurisprudence, only accepting a counterclaim when the debtor has a judicial decision against the bank, or an enforceable title. But recently, a significant faction of Court of Appeal judges has challenged this jurisprudence and accepted the discussion of counterclaims when there was no previous decision or enforceable title, which understandably raised eyebrows, particularly within banks. This past year, however, the Supreme Court upheld its jurisprudence and restated it – see, for example, the decision of 4 July 2019.2
Another topic of discussion is the resolution measure applied to Banco Espírito Santo and Banif. Although the validity of the measure itself may only be challenged before the administrative courts, the civil courts have been indirectly asked to review these measures, especially as to whether it was a constitutional decision not to transfer subordinated bonds to Novo Banco. In the decision of 19 June 2019,3 the Supreme Court held that the resolution measures of BES did not breach the constitutional principles of trust and legal certainty, nor the principle of the separation of powers.
In mis-selling of financial instrument claims, the decision on who bears the burden of proof regarding the fulfilment of duties of information is quite relevant. Although the majority of the jurisprudence considers that burden of proof rests with the claimant, in 2017 the Supreme Court, in an interest-rate swap agreement case, ruled that due to the regime on general contractual clauses the burden of proof that the bank complied with its duties of information rested with the bank. This 2017 decision could have been one of a kind, especially because the rapporteur retired immediately after it was handed down. However, in a decision of 26 March 2019 the Supreme Court ruled once again that in swap agreements it is the bank that has to prove it complied with its duties of information.4
Also in regard to mis-selling claims, jurisprudence has held that the claimant must prove the cause-effect relationship between the breach of duties and the damages suffered. This usually amounts to having to prove that the claimant would not have bought the financial products if the bank had complied with its duties. This cause-effect relationship is difficult to prove and is, therefore, one of the main reasons claims against banks are rejected. However, in the past few years some decisions from the Courts of Appeal argued that this cause–effect relationship is presumed, and hence the banks had the burden of proving such relationship did not exist. This presumption would certainly become a game changer in most of the mis-selling claims. However, recently the Supreme Court upheld and restated its previous jurisprudence, stating there was no such presumption (see, for example, the decision of 6 November 2018).5
A recent trend in banking litigation is to hold banks that sold financial products liable for not disclosing information subsequent to the investment. This has sparked a debate on whether banks are required to provide information on changes in the risks of the investment when they are only acting as custodians and not as portfolio managers. These changes include, for example, the substitution of the issuer of guarantor of bonds after the investment was made. This issue is of particular relevance to bondholders of Portugal Telecom, because when the group was sold to Altice the bondholders general meeting voted in favour of changing the issuer to a company that was left with the almost insolvent Oi group.
This year, the Lisbon Court of Appeal rendered a decision that had the following summary:
in the course of the execution of a contract for the deposit and registration of financial instruments, the financial intermediary and custodian cannot alienate itself from the changes related with the entity that issued the bonds as well as those related with the maturity date of the products, factors which are capable of having negative reflections on the outcome and solidity of the products, and should inform the investor in a way so as to allow him to adopt, in due time, the conduct that minimises or prevents risks which are known and are not negligible, and which threaten the normal conservation and fructification of the financial instruments6
This decision was often referred to by those who argued that the banks should have informed the bondholders that a change in the issuer was approved. However, a closer look at the decision reveals that, in fact, the court only accepted this duty as a plausible legal outcome in order to justify the decision to ask the lower court to further investigate some facts, but directly stating that it did not wish to anticipate a ruling on that issue.
In 2014, the Supreme Court rendered a decision to harmonise the jurisprudence (a decision that carries special weight and is taken by all the judges of the civil sections and not only by three judges) on a very important matter for banks: the ranking of claims in cases involving the mortgage of a property with a promissory buyer, when a bank subsequently claims for damages due to the breach of the promissory agreement, in the event that the possession of the property had been given to the promissory buyer. In that 2014 decision, the Supreme Court decided that the claim from the promissory buyer was ranked above that of the bank only when the buyer should be considered a consumer. However, the Supreme Court did not define what should be considered a consumer for that purpose. There was hence a subsequent debate on whether a natural person who promised to buy the property to resell it or to carry out a commercial activity in it should be considered a consumer. In a decision of 12 February 2019, the Supreme Court rendered another decision to harmonise the jurisprudence, stating that, for the purposes of the 2014 decision, a consumer was only defined as a party who intends to use the property for private purposes and not to resell it or the use it for a lucrative or professional activity.
Two other court decisions from these past 12 months are also worth mentioning.
A decision from 31 January 20197 ruled that a client who had lost his wallet, containing a debit card, but who only reported it to the bank three days after the loss was liable for the improper use of the card by third parties.
A decision from 22 November 20188 ruled that a bank may not annul a transfer order for securities on the grounds of mistake, but rather that it must request the annulment before a court of law.
Finally, one of the most important decisions of 2019 was a decision by the Portuguese Competition Authority that imposed fines of a total sum of €225 million on 14 banks acting in Portugal, on the grounds that these banks had exchanged information between 2002 and 2013, on sensitive future business behaviour regarding spreads, and on recent sensitive data regarding production values. The decision is subject to appeal in a court of law and, if upheld, may spark significant damages claims, although the Competition Authority considered it to constitute an infringement by object (and not by effect) and hence it did not present evidence of effects on competition, which makes it difficult for consumers to prove damages.
iii RECENT LEGISLATIVE DEVELOPMENTS
One of the most significant legislative developments in Portugal has been the entry into force of Regulation (EU) 2017/2402, of the European Parliament and of the Council, of 12 December 2017, which lays down a general framework for securitisation and creates a specific framework for simple, transparent and standardised securitisation (Securitisation STS). These frameworks aim at separating complex and opaque securitisations, which entail a high level of risk, from the simpler and more transparent securitisations, which are now encompassed within the category of Securitisation STS.
Additionally, this Regulation sets out the distinction between traditional securitisation and synthetic securitisation. While the first requires the transfer of the economic interest in the exposures being securitised through the transfer of ownership of those exposures, the latter occurs when the transfer of risk is carried out by means of credit derivatives or guarantees and the ownership of the exposures being securitised does not change, as it remains with the originator.
ii Mass assignment of credits
The Portuguese government approved Decree-Law No. 42/2019, of 28 March, which sets forth a simplified framework for the mass assignment of credits, and seeks to simplify the assignment of non-performing loans. This framework was approved in the context of the Capitalise Programme (Programa Capitalizar), which was set up by the Portuguese government in 2016, with the aim of eliminating or mitigating some of the financial constraints experienced by Portuguese companies.
This simplified framework is applicable to the assignment of credits, provided that (1) the assignee is a credit institution, a financial company or a securitisation company; (2) the assignment price is, at least, €50,000; and (3) the portfolio includes at least 50 different credits. The assignment of credits shall be in the form of a private document and is subject to registration, which must be carried out on an urgent basis.
iii Payment services
Another significant legislative development in Portugal has been the implementation of Directive (EU) 2015/2366, of the European Parliament and of the Council, of 25 November 2015, which sets out the new legal framework applicable to payment services. The implementation of this directive in Portugal has been carried out through Decree-Law No. 91/2018, of 12 November, which establishes the requirements to access the activity of payment institutions and electronic money institutions. This legislation has introduced several changes, namely: (1) new means and services of payment; (2) the acquisition or decrease of qualified stakes in payment institutions becomes subject to the non-opposition of the Bank of Portugal; (3) the providers of services shall establish remuneration policies that cover the employees who directly contact clients, or who are engaged in management or supervisory functions; and (4) the implementation of security measures that are sufficient to protect the confidentiality of the users' security credentials.
iv Markets in financial instruments
The Markets in Financial Instruments Directive II (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) have become effective as from January 2018. This legislative package aims to create a level playing field for financial firms to compete in the European Union's financial markets, and to ensure a consistent level of consumer protection across the European Union.
In Portugal, the implementation of MiFID II and MiFIR was carried out by Law No. 35/2018, of 20 July, which brought several changes to the relevant legal frameworks in the financial sector, in particular the General Framework for Credit Institutions and Financial Companies. For instance, it has introduced the provision of investment services by tied agents of credit institutions; and the provision of investment advice services on structured deposits by investment advice companies.
v Data protection
Regulation (EU) 2016/679, of the European Parliament and of the Council, of 27 April 2016, also known as the General Data Protection Regulation, became effective in Portugal as from May 2018. This regulation aims to unify the framework on the processing and movement of personal data through the European Union, and imposes a set of new obligations on companies, as well as strengthening the rules on consent. Taking into account that banks handle large quantities of personal data, this regulation has also brought significant challenges in terms of compliance.
vi Urban leases
In October 2018, the tenants' rights of preference set forth in the Civil Code were amended by Law No. 64/2018. This law granted tenants who had leased just part of an individual real estate property the option to exercise a right of preference on the sale (including judicial sales on foreclosures) for just a percentage of the property corresponding to the leased part, and having the right of use of such part. The law was intended to allow tenants of apartments in buildings that were not organised on a horizontal property basis to exercise preference only on the apartment rather than on the whole building. This, however, may have unexpected effects on foreclosures, because if the right of preference is exercised on only part of the estate, the buyer of the remainder not only may not sell individual apartments (because they lack separate legal status) but also may not sell nor take decisions alone regarding the whole building, because the buyer is not the sole owner. This may affect the price investors are willing to pay for buildings that are not under a horizontal property regime, if there are leases on parts of the property.
In February, Parliament enacted Law No. 13/2009, with the purpose of correcting unbalanced situations between landlords and tenants, to reinforce the security and stability of urban leases and to protect tenants in particularly fragile situations. This law introduced significant changes to the urban lease regime. Notably – and although according to the law the lease agreement should be made in writing – the tenant may now prove the lease by other means if the lack of a written agreement is not considered to be his or her fault. This obviously increases the risk of litigation and surprise leases upon foreclosure.
iv CHANGES TO COURT PROCEDURE
Decree-Law No. 97/2019, of 26 July 2019, introduced two changes that may be relevant to banks.
One, which may significantly change the way appeals on the facts are decided, allows the depositions of witnesses to be videotaped for the first time, rather than just recorded. It may, however, take some years until the courts have the means to videotape depositions. However, if the depositions are videotaped, courts of appeal may decide an appeal on the facts by viewing the tapes. In this case, a court of appeal will no longer have a strong argument in saying that they should in principle refrain from changing the decision on the facts, due to the lack of immediacy.
Another change, regarding enforcement proceedings, sets forth that the debtors' claims against public entities may be seized electronically to satisfy the claim that is being enforced. It is common for debtors to be entitled to IRS refunds and this change in law will expedite the seizure of these tax claims.
v PRIVILEGE AND PROFESSIONAL SECRECY
Pursuant to the Portuguese Bar Association Conduct Rules, lawyers shall keep confidential all the facts and documents whose knowledge derives from the exercise of their functions as lawyers and the provision of legal services.
This duty of secrecy is binding upon all lawyers registered with the Portuguese Bar Association in the performance of their professional activity in Portugal or abroad, and is also extended to all people who collaborate with the lawyers in their professional activity.
It should also be noted that the duty of secrecy is non-waivable by the client, which means that the lawyer will be bound to it, even in the event that the client releases him or her from the duty of secrecy. However, a lawyer is allowed to disclose privileged information for the purposes of preserving the reputation of the lawyers or clients' reputation, legal rights and legitimate interests, provided that prior authorisation is obtained from the competent body of the Portuguese Bar Association.
In general, the lawyer–client privilege is respected in Portugal. Whenever a lawyer is requested by a judge to testify in criminal proceedings, the Portuguese Bar Association shall be consulted on privilege issues. On the other hand, any criminal investigation carried out in the office of a lawyer or law firm shall be done in the presence of a representative of the Portuguese Bar Association.
In the event that the duty of secrecy is breached, the information disclosed by the lawyer cannot be used to provide evidence, nor taken into account by the court. Finally, a breach of lawyer–client privilege is deemed a serious offence, and may lead to criminal charges and to disbarment from the Portuguese Bar Association.
vi EXCLUSION OF LIABILITY
Under Portuguese law, exclusion or reduction of liability clauses are generally not admissible. On the one hand, Article 809 of the Portuguese Civil Code sets forth that any clause pursuant to which a creditor waives any indemnity rights, in advance, is deemed void. Such clauses are restrictively interpreted by legal scholars and the courts, which have only accepted exclusion or reduction of liability clauses in cases of negligent breach (i.e., excluding liability in cases of wilful misconduct or gross negligence is not possible under Portuguese law). On the other hand, Article 18(c) of the Portuguese Legal Framework of Unfair Terms lays down that any general contractual clauses that exclude or limit, directly or indirectly, liability in the event of wilful misconduct or gross negligence, are unlawful.
Notwithstanding the above, the parties can use a penalty clause as a mechanism to regulate their liability. Thus, the penalty clause allows the parties to predetermine the indemnity amount due in the event of contractual breach, provided that it does not exceed the damage resulting from the breach of the main contractual obligation. The penalty clause may, however, be reduced by a court, in the event the indemnity amount pre-established by the parties is deemed disproportionate when compared with the actual damages.
Depending on the type of financial service, there might be specificities in this regard.
vii REGULATORY IMPACT
The regulatory framework has a significant impact upon banking litigation. In recent years, banks have been subject to an increase in the number of regulatory obligations.
In particular, MiFID II has brought several and demanding pre-trade and post-trade transparency obligations, which are applicable to banks in the provision of financial services. The General Data Protection Regulation and the second Payment Services Directive (PSD2) have also brought a number of significant challenges to banks, not only compliance-wise, but also in terms of business models.
The proliferation of regulatory provisions and obligations in the financial sector is a clear source of increased risk of litigation based on lack of compliance. Moreover, the reshaping pressure brought about by the General Data Protection Regulation and the PSD2 may also lead the banks to walk previously unknown paths or to be willing to take more risk, or both, which might naturally result in an increase of litigation with clients, or even with the regulatory authorities.
VIII OUTLOOK AND CONCLUSIONS
The regulatory burden over the entities operating in the financial markets and providing financial services is expected to increase at a demanding pace in the next few years.
In terms of planned legislative changes specific to the Portuguese jurisdiction, it is worth noting that, in March 2019, the government approved Draft Law No. 190/XIII, the main purposes of which are: (1) the reinforcement of the coordination and cooperation between the three existing financial supervisors; (2) the prevention of potential conflicts of interest in the context of the financial supervision; and (3) the reinforcement of the transparency and accountability of the financial supervisors.
In light of the above, Draft Law No. 190/XIII proposes the creation of a National System of Financial Supervision, composed of the following entities:
- the existing supervisory bodies (Bank of Portugal, Portuguese Securities Market Commission and Portuguese Insurance Supervisory Authority), which would maintain their competences, but have their cooperation duties reinforced; and
- the Supervisory and Financial Stability Council and the High Council of Financial Policy – two new entities that would lead to the termination of the existing National Council of Financial Supervisors, the National Committee for Financial Stability and the National Council of the Securities Market.
The Supervisory and Financial Stability Council would become the macroprudential national authority and the entity responsible for the resolution of financial institutions, whereas the financial supervision, economic and monetary policy decisions would be carried out by the High Council of Financial Policy.
The Minister of Finance recently stated that the government has been working on this new legal framework, in coordination with the European Central Bank.
1 Nuno Salazar Casanova and Pedro Ferreira Malaquias are partners at Uría Menéndez.
2 Proceedings no. 132/11.0TCFUN-A.L1.S2.
3 Proceeding no. 4140/14.0YYLSB.L1.S1.
4 Proceedings no. 1942/12.6TVLSB.L1.S2.
5 Proceedings no. 6295/16.0T8LSB.L1.S1.
6 Decision of 8 January 2019, Proceedings no. 2115/17.7T8VFX.L1.7.
7 Proceedings no. 2344/16.0T8PNF.P1.S1.
8 Proceedings no. 236/14.7T8PRT.P2.S2.