Bank clients face uphill battle before Swiss courts: Addendum

In a LinkedIn post dated 25 August 2017, I had reported that the Swiss Federal Tribunal (SFT) had rendered an interesting judgment on 15 June 2017 (matter 4A_379/2016 dated 15 June 2017) regarding the issue of a custodian bank’s liability for unlawful acts of an independent / external asset manager (EAM).

In the above-mentioned judgment 4A_379/2016, the SFT had overturned the cantonal judgment and referred it back to the lower court for a new decision. This new decision of the cantonal court, dated 16 January 2018, was again challenged by the defendant bank before the SFT.

The new SFT judgment in the relevant matter, which is dated 7 January 2019 (case number: 4A_119/2018), is a further confirmation that bank clients face an uphill battle before Swiss courts, which I discussed in my recent LinkedIn post dated 9 January 2019.

Before briefly discussing one interesting aspect of this new SFT judgment 4A_119/2018, it is important to recall the basic facts related to the judgments at issue. Hence, in a strongly compressed and simplified version, this is the dispute that led to the above-mentioned decisions:

The bank customer A had been attended to by the bank employee B for many years. When B left the bank Z (where A had deposited her assets, managed by bank Z through its employment B) to join the EAM V, the bank customer A terminated the asset management agreement with bank Z and entered into a new asset management agreement with the EAM V. Additionally, A granted the EAM V a limited power of attorney (LPoA) vis-à-vis the bank Z, authorizing the EAM V (represented by B) to manage her assets deposited at bank Z, but not to make any withdrawals (therefore, limited PoA).

Following such new structuring of A’s banking relationship, B embezzled the above-mentioned assets of A, basically by having forged wire instructions directed to bank Z, which have allegedly been signed by A (but forged by B). More specifically, the forged wire instructions in a total amount of approximately EUR 1.2m ordered the custodian bank Z to transfer A’s monies to a company T, active in precious metals trading. When an employee of bank Z double checked certain instructions with B the latter told the bank that customer A wished to invest in precious metals.

When A learned that her assets have been embezzled by B she sued the custodian bank Z to recover her assets. A’s initial statement of claim was filed on 15 November 2012, i.e., today over six years ago.

As far as the SFT’s reasoning in the first judgment 4A_379/2016 dated 15 June 2017 is concerned, the following essential points shall be briefly summarized:

From the custodian bank’s perspective, in a case like the present one, there are two basic lines of defense: The first line of defense is based on the LPoA, basically arguing that the damaging instructions were covered by the LPoA (LPoA Argument). The second line of defense is based on the custodian bank’s general terms and conditions (GTC), in which banks usually include a clause pursuant to which the risk of forged instructions is shifted to the bank customer, subject to grossly negligent mistakes made by the bank (GTC Risk Shifting Argument).

(1) Line of defense no. 1: LPoA Argument

In the SFT judgment 4A_379/2016, this argument did not fly, because the relevant transactions were not covered by the relevant LPoA. LPoA granted to EAM usually state that the EAM may not instruct transactions that lead to outflows without a corresponding inflow. In other words, an EAM can – based on the LPoA – instruct the custodian bank to purchase, on behalf of the relevant customer, financial assets, because the relevant outflow (purchase price) leads to an inflow (the purchased financial asset, such as shares or bonds). However, in the matter in question, the relevant transactions (wire transfers to company T) did not have any corresponding inflow, such as physical gold. Such transactions were, therefore, not covered by the relevant LPoA.

(2) Line of defense no. 2: GTC Risk Shifting Argument

In light of the relevant circumstances, the SFT concluded that custodian bank Z should have double checked the instructions at issue with its customer, not only with the customer’s EAM. Further, the SFT explained its opinion that having failed to do so the custodian bank had – in light of the relevant circumstances – grossly violated its duties of diligence in the present context, and that for this reason the custodian bank was not entitled to invoke the GTC risk shifting clause related to forged instructions.

As transpires from the explanations above, the factual and legal situation at the basis of this dispute, particularly of the new SFT judgment 4A_119/2018, is quite complex. However, for the purposes of this post, I would like to focus on the following specific aspect:

Customer A had agreed with bank Z that bank Z’s mail to her would be retained by the bank. Such an agreement, which was at least in the past offered by Swiss banks as a standard service, is referred to as a hold mail agreement, and the mail retained by the bank on the basis of such an agreement is referred to as hold mail or retained mail.

During the period of approximately four years in which the above-mentioned embezzlement was carried out to her detriment, A had never visited bank Z to examine her retained mail.

In the proceedings before the cantonal court, bank Z had, in essence, argued that A’s aforementioned passiveness in relation to her retained mail constituted a violation of A’s contractual duties vis-à-vis the bank, and that had A not been so passive but had examined her retained mail, the embezzlement could, essentially, have been prevented.

The cantonal court had rejected in its above-mentioned judgment dated 16 January 2018 bank Z’s above-mentioned argument, having concluded, in essence, that a bank client has no obligation vis-à-vis the bank to regularly check the state of his or her bank account(s). However, the SFT rejected the cantonal court’s aforementioned reasoning, and concluded, in essence, that A’s not checking of her hold mail during a period of four years constituted a violation of her contractual duties vis-à-vis bank Z. The SFT’s key considerations in this regard are quoted below (excerpt of consideration 6.2 of the judgment 4A_119/2018; in the French original and then in a tentative English translation):

“Certes, il n’existe pas de clause particulière des conditions générales obligeant la cliente à relever son courrier en banque restante. Il n’en demeure pas moins que, selon la jurisprudence, la cliente a envers la banque une obligation de diligence, découlant des règles de la bonne foi, qui lui imposait de relever le courrier qui lui était adressé en banque restante, pour pouvoir, cas échéant, contester les opérations qui lui paraissaient irrégulières ou infondées, et empêcher ainsi l’aggravation du dommage. La cliente a en tout cas violé son devoir de diligence en ne relevant pas sa banque restante entre 2007 et 2011.”

“Admittedly, there is no specific clause in the bank’s general conditions obliging the customer to collect her retained bank mail. Nevertheless, according to the case law, the client has a duty of care towards the bank, arising from the rules of good faith, which required her to collect the mail sent to her in the hold mail account, in order to be able, if necessary, to contest transactions which she considered irregular or unfounded, and thus prevent the aggravation of the damage. In any event, the customer breached her duty of care by not examining her retained mail between 2007 and 2011.”

With its new judgment 4A_119/2018, the SFT lifted the cantonal court’s new decision dated 16 January 2018, and remanded the matter to the cantonal court for a second time. On the basis of the SFT instructions contained in its new judgment, the cantonal court will have to determine in a new ruling, essentially, whether or not the relevant embezzlement could have been prevented if customer A had dutifully consulted her retained mail. If the answer to this question is in the affirmative, the cantonal court will, in essence, have to, pursuant to the SFT, weigh the respective faults of, on the one hand, A, who did not examine her hold mail during the above-mentioned period, and, on the other hand, of bank Z, which did not verify directly with her client (instead of only with the EAM) the unusual orders.

I think that it is debatable whether or not the SFT’s position is correct that A’s not checking of her hold mail during a period of four years constituted a violation of her contractual duties vis-à-vis bank Z. In any event, this new SFT judgment 4A_119/2018 constitutes, in my opinion, a further illustration of how complicated and protracted proceedings before Swiss courts can be in bank liability cases.

PHH, Zurich, 31 January 2019 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice.

Rechtsgebiete: Bank- und Finanzmarktrecht