When do Swiss banks have to examine their customers’​ transactions?

When do Swiss banks have to examine their customers’​ transactions?

Recently, the Commercial Court of the Canton of Zurich (the Zurich Commercial Court) uploaded a new judgment to its website, which is especially interesting for (Swiss) banking lawyers.

In this new decision dated 8 May 2019 (case reference: HG160258-O) the Zurich Commercial Court had, in essence, to determine whether or not the defendant, a Zurich-based bank, could in good faith execute its client’s instruction to carry out a wire transfer in an amount of CHF 13m.

In the relevant dispute, the claimant, a Swiss share company (Aktiengesellschaft), had, in essence, argued that the bank was not allowed to carry out in good faith the above-mentioned wire instruction, but should have realized that the former company representatives who gave such instruction did not act in the company’s interest. Some of the Zurich Commercial Court’s key considerations in relation to this dispute, which arises quite often in the banking business, shall be summarized below.

In relation to the claimant’s above-mentioned argument the Zurich Commercial Court first points out that under Swiss share company law the company representatives may carry out any transaction that the company’s purpose may entail (consideration III. 2.1, at page 12). When determining whether or not a certain transaction is still covered by a company’s purpose, the Swiss Federal Tribunal construes a company’s purpose in a very extensive fashion (consideration III. 2.1, at page 13). In a nutshell, pursuant to various Swiss Federal Tribunal precedents, as long as a transaction does not clearly and directly run counter to the company’s purpose, the other party may assume that such transaction is still covered by the company’s purpose, provided that the other party is acting in good faith, in other words, does not or should not have knowledge that the company representative(s) acting on behalf of the company is (are) not authorized to carry out the relevant transaction.

In German, the Zurich Commercial Court’s key consideration in relation to the above reads as follows (consideration III. 2.1, at pages 13-14):

Für den gutgläubigen Dritten ist dementsprechend einzig entscheidend, dass das Rechtsgeschäft nicht direkt und offensichtlich im Widerspruch zum Gesellschaftszweck steht, sodass es durch diesen geradezu ausgeschlossen wird. Die Ungültigkeit von Vertretungshandlungen ‚wegen Zweckwidrigkeit’ soll nur ‚in Extremfällen’ anzunehmen sein, so beispielsweise bei Handlungen, die dem Gesellschaftszweck diametral entgegenlaufen oder diesen gar zu vereiteln geeignet sind. Namentlich kann dies vorliegen bei einer Handlung der faktischen Liquidation oder wenn ein Interessenkonflikt zur vertretenen juristischen Person erkennbar ist oder bei gebührender Sorgfalt erkennbar wäre, ansonsten sich der (gutgläubige) Vertragspartner auf den Handelsregistereintrag verlassen kann […].

In a tentative English translation, the quote above reads as follows:

Accordingly, for the bona fide third party, the only decisive factor is that the legal transaction is not directly and obviously contradictory to the company’s corporate purpose, so that it is virtually excluded by it. The invalidity of acts of representation ‘because of impropriety’ [or, rather, because they are ultra vires] should only be assumed ‘in extreme cases’, for example in the case of acts which run diametrically opposed to the purpose of the company or are even capable of thwarting it. In particular, this may be the case with an act of de facto liquidation or if a conflict of interests with the legal entity represented is recognisable or would be recognisable with due care, otherwise the (bona fide) contractual partner may rely on the entry in the commercial register [i.e., that a certain person(s) is (are) authorized to validly and bindingly represent a company].

As mentioned above, the issue of good faith is critical in the present context. As far as Swiss banks are concerned, the Zurich Commercial Court points out that it is in light of the concrete circumstances of the individual case that it is to be determined how carefully a transaction is to be examined by the banks (consideration III. 2.1, at page 15). Under normal circumstances, i.e., if and when the relevant transaction is part of the normal course of business, the banks are not obligated to carry out any more detailed background checks, subject to specially agreed contractual obligations, for example in the form of an asset management agreement (Id.). However, more detailed checks may be required if the bank is confronted with an accumulation of unusual circumstances, or if the relevant transaction may entail conflicts of interests.

In German, the Zurich Commercial Court’s key consideration in relation to the above reads as follows (consideration III. 2.1, at page 15):

Von einer Bank sind grundsätzlich – soweit nicht eine bestimmte vertragliche Verpflichtung (z.B. ein Vermögensverwaltungsmandat) besteht – nur vertiefte Untersuchungen zu fordern, wenn sie mit Geschäften konfrontiert wird, die nicht zum normalen Geschäftsverlauf gehören […]. Eine weitergehende Kontrolle drängt sich hingegen auf, wenn eine Häufung ungewöhnlicher Umstände vorliegt. Zu beachten sind die konkreten Umstände […]. Weiter sind namentlich Geschäfte heikel, in welchen Interessenkonflikte vorliegen können […].

In a tentative English translation, the quote above reads as follows:

In principle, unless there is a specific contractual obligation (e.g., an asset management mandate), a bank is only required to conduct in-depth investigations if and when it is confronted with transactions that are not part of the normal course of business […]. More extensive controls, on the other hand, are necessary if there is an accumulation of unusual circumstances. The specific circumstances […] must be taken into account. Furthermore, transactions in which conflicts of interests may exist are particularly delicate […].

As mentioned above, the issue of a bank’s good faith is determined, in particular, by the question whether or not a transaction is part of the normal course of business. If it is, the Zurich Commercial Court points out that a bank is not obligated to question or examine more closely a customer’s business decisions (consideration III. 3.3.2, at page 26).

In German, the Zurich Commercial Court’s key consideration in relation to the above reads as follows (Id.):

Vor Augen zu halten ist, dass es grundlegend weder angezeigt noch notwendig war, dass die Beklagte systematisch – ohne Hinweise auf Irregularitäten – jegliche geschäftlichen Entscheide ihrer Kunden hinterfragte. Für eine solche flächendeckende Prüfung besteht weder eine rechtliche Grundlage noch wäre dies ohne unverhältnismässigen Aufwand praktikabel.

In a tentative English translation, the quote above reads as follows:

It should be borne in mind that given that there were no indications of irregularities, it was neither advisable nor necessary for the defendant bank to systematically question its customers’ business decisions. There is neither a legal basis for such a comprehensive review obligation nor would this be practicable without disproportionate effort.

As also mentioned above, transactions in relation to which conflicts of interests may exist are specifically delicate. In this regard, the Zurich Commercial Court in essence points out that if a party is or should be aware that a company representative is subject to a conflict of interests, the former may not assume that the company representative is authorized to act in the name of the company (consideration III. 3.4.2, at page 30). In which situation a party should be aware of a conflict of interests depends on the type of transaction at issue (Id.).

In German, the Zurich Commercial Court’s key consideration in relation to the above reads as follows (Id.):

Erkennt der Dritte einen Interessenkonflikt zwischen Organ und der Gesellschaft oder hätte er ihn bei gebührender Sorgfalt erkennen können, muss er grundsätzlich davon ausgehen, dass das unter einem Interessenkonflikt handelnde Organ nicht zur Vertretung der Gesellschaft befugt ist. Bei einer solchen Erkennbarkeit fehlt es auch im Aussenverhältnis an der Vertretungsmacht, ungeachtet ob sich der Interessenkonflikt im konkreten Fall zum Nachteil der vertretenen Person ausgewirkt hat […]. Die Aufmerksamkeit, die vom Vertragspartner hinsichtlich eines möglichen Interessenkonflikts verlangt werden kann, hängt von der Art des abgeschlossenen Rechtsgeschäfts ab […].

In a tentative English translation, the quote above reads as follows:

If the third party identifies a conflict of interests between the company representative and the company or if he or she could have identified it with due care, he or she must generally assume that the representative acting under a conflict of interests is not authorized to represent the company. In the event of such recognisability, the power of representation is also lacking in the external relationship, irrespective of whether the conflict of interests in the specific case has had a detrimental effect on the company represented […]. The attention that may be required of the contracting party in respect of a possible conflict of interests depends on the nature of the transaction […].

The Zurich Commercial Court decision HG160258-O discussed herein had been appealed to the Swiss Federal Tribunal. With its judgment 4A_289/2019 dated 14 October 2019 the highest Swiss court rejected the appeal filed with it and confirmed the Zurich Commercial Court’s judgment at issue, which, in other words, became final (rechtskräftig).

It is also to be pointed out that the Swiss financial markets regulator FINMA had investigated the relevant matter and had retained that the bank in question would have violated Swiss prudential financial markets law by not having carried out sufficient risk controls in the present context. This FINMA order has, however, been lifted by the Swiss Federal Administrative Court, with its judgment B-5756/2014 dated 18 May 2017.

The complete background to the relevant dispute is complex, and not having knowledge of all relevant facts, it is not possible to make a final assessment of this matter. That said, and generally speaking, it is true that banks are regularly sued as deep pockets when investors are harmed. At a time when this trend is encouraged or supported by the constant imposition of new, more detailed and far-reaching due diligence obligations on the financial institutions, the ruling of the Zurich Commercial Court discussed herein is a positive sign. It recalls and emphasises that banks are only liable for harmful business or investment decisions of their customers if the banks are guilty of a breach of due diligence obligations.

Philipp H. Haberbeck, Zurich, 26 November 2019 (Your Swiss Commercial Litigator)

The information contained in this article is for general informational purposes only and is not intended to constitute legal advice. Readers of this article should not take any actions or decisions without seeking specific legal advice. Any mandate is subject to the full execution of an engagement letter.

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