Bank customer claims for damages: Swiss Federal Tribunal raises hurdle further

As I have written in my doctoral thesis on loss of profit claims under Swiss commercial law (at para. 363):

“… a Swiss commercial litigator will have a tendency to first determine whether the relevant party sustained a damage in the legal sense, because without such damage (assuming that the dispute is governed by Swiss law) further efforts in relation to an action for damages are not useful.”

The crucial importance under Swiss commercial law of the correct calculation and presentation of the claimed financial damage is stressed by a new Swiss Federal Tribunal (SFT) precedent dated 16 April 2018, published in excerpts as case BGE 144 III 155.

For the purposes of this article, the key elements of the relevant matter shall be summarized in a very compressed fashion:

The claimant, a Turkish business man (the Customer), had opened a bank account with a Swiss bank (the Bank), with an initial total value of approximately USD 7.3m. In relation to such account, the Customer had granted the Bank an investment advisory mandate. The Commercial Court of the Canton of Zurich (the Zurich Commercial Court) as the lower instance in the matter at hand had, in essence, retained that the Customer’s relationship manager at the Bank had made sixteen unauthorized transactions that resulted in an estimated financial damage of roughly USD 5.6m. In its judgment dated 4 October 2017 (case reference HG140233-O), the Zurich Commercial Court ordered the Bank to compensate the Customer for this loss.

Before the SFT precedent at issue is discussed, it is important to stress the following circumstances, as they result from the SFT judgment: Pursuant to the Zurich Commercial Court, the Bank was liable to the Customer, because the Bank’s relationship manager in charge of the Customer was responsible for carrying out sixteen unauthorized transactions that resulted in a significant, multi-million USD loss.

Despite the Zurich Commercial Court’s above-mentioned factual findings, the Bank was successful with its appeal to the SFT; the SFT dismissed the Customer’s claim in its entirety. How can this be?

At the basis of the SFT’s relevant reasoning is, in my opinion, a key axiom of Swiss damages law, which I explained as follows in my above-mentioned doctoral thesis (at para. 362):

“One of the fundamental axioms of Swiss damages law is that its function is to put the aggrieved party as accurately as possible into the financial position it would be in had the infringing act or omission (i.e., the contract violation or the tortious act) not taken place.”

From this axiom flows, inter alia, a general principle under Swiss damages law, pursuant to which a damaged person shall never obtain a compensation that exceeds the financial damage actually sustained by that person.

This axiom is also at the basis of the SFT’s constant and basic financial damage calculation formula pursuant to which the importance of a financial damage corresponds to the arithmetic difference between two net worth situations, an actual and a hypothetical net worth situation: On the one hand, the importance of the damaged person’s actual and current net worth, on the other hand, the hypothetical importance of the damaged person’s net worth had the damaging event not happened.

In the matter at hand, the Zurich Commercial Court had applied the above-mentioned Swiss law positions as follows: Essentially pointing to the difficulty of calculating the relevant financial damage on the basis of individual transactions, the Zurich Commercial Court considered it justified and admissible under the given circumstances to basically estimate the relevant financial damage in light of the development of the total Customer assets held at the Bank.

The SFT did not agree with the Zurich Commercial Court’s approach. Essentially considering that the financial damage sustained by the Customer should have been determined as accurately as possible, the SFT held that contrary to the lower instance’s approach, the relevant financial damage should have been determined for each of the sixteen unauthorized transactions individually. In this regard, the SFT stated that the correct approach would have been to take each of the sixteen unauthorized transactions and to show, by applying the above-mentioned basic financial damage calculation formula, for each of the transactions the difference between, on the one hand, the actual performance of such unauthorized transactions with, on the other hand, the hypothetical performance had the relevant transactions been made in line with the investment advisory mandate granted to the Bank. Because the Customer had not presented his damage to the Zurich Commercial Court in this fashion, the SFT rejected his entire claim for damages.

What to think about this new precedent? I concur with Damian A. Fischer’s assessment, formulated in his current article on BGE 144 III 155, published in the Swiss law journal AJP. From a dogmatic viewpoint, the SFT’s reasoning and decision are stringent. However, from the perspective of investor protection it is regrettable that it has now become even more difficult for injured bank clients to obtain compensation for their losses before Swiss courts because of the very strict requirements for proof of loss demanded by the SFT.

With regard to the concrete matter at issue, the outcome pursuant to the SFT precedent discussed herein is downright shocking. On the basis of the Zurich Commercial Court’s factual findings, the Customer had indeed sustained a significant loss because of unauthorized transactions carried out by the Bank’s employee, but after more than three years of litigating before the Zurich Commercial Court and the SFT, with considerable costs, he does not get any compensation at all. In light of the fundamental role of civil procedure, to permit the enforcement of material rights, such an outcome can only be regretted. Despite all dogmatic stringency of the SFT’s reasoning, one can ask oneself whether a judgement that so strongly collides with the general sense of justice can still be qualified as correct. With regard to other legal systems, forms of compensation such as punitive damages may rightly be rejected, but that an injured party does not receive any financial compensation at all in a case in which a significant financial damage has indeed occurred, seems also questionable.

For plaintiffs, the precedent discussed in this post signifies that maximum attention must be paid to the presentation of the asserted financial damage. In complex cases, retaining the services of forensic accounting experts might be worthwhile in this regard, as I pointed out in my doctoral thesis on loss of profit claims under Swiss commercial law (for example, at page 227).

PHH, Zurich, 10 October 2018 (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