On 2 September 2016, the Dutch Supreme Court limited the ability of financial institutions to invoke the contributory negligence-defense (“eigen-schuld-verweer“) when they have not only neglected a special duty of care towards their counterparty under Dutch civil law but have also violated an obligation under Dutch public law (ECLI:NL:HR:2016:2012 and ECLI:NL:HR:2016:2015).
Double duties under Dutch law
In the Netherlands, as elsewhere within the European Union, financial institutions are obliged to comply with various public law obligations. Furthermore, Dutch courts view these financial institutions as professional and expert parties with an important role in society. This image is reflected in Dutch civil case law, which stipulates that these institutions have a special duty of care towards the private individuals who are their counterparties. Violation of the special duty of care can constitute a tortious act and lead to civil law liabilities.
Towards the late 1990s, a handful of relatively small but successful businesses marketed unconventional and high risk retail investment products. The products were aggressively marketed amongst Dutch individuals with methods varying from television ads to door-to-door salesmen. Amongst these products was the so-called securities lease contract. This product was high-risk, because it involved investing in the securities market with borrowed money. The borrower would have to repay both the principal sum and the accrued interest irrespective of the performance of the investments. The risk that the borrower would be obliged to repay any residual debt if the value of the securities did not cover the loan was not or insufficiently disclosed.
In 2001, at the height of their popularity, around 6% of Dutch households had concluded one or more securities lease contracts. However, the aftermath of the Dotcom bubble crash and the retraction of a fiscal incentive policy severely diminished their popularity. Dutch private individuals were faced with decreasing share values and increasing residual debts. To solve this problem, they turned to the Dutch court system.
They successfully argued that they, inexpert private individuals, had been duped by professional financial institutions because the latter had not sufficiently warned them against the risks they were facing. The Dutch courts agreed and in doing so conferred a double special duty of care on financial institutions. Financial institutions are now obliged to (i) properly inform and warn private individuals to prevent them from taking on risks that they cannot reasonably bear, and (ii) to inquire after the potential borrower’s income and financial position to assess what risks they can bear. If the institution has violated its special duty of care, it becomes liable for the damages the private individual has suffered as a result.
The Supreme Court accepts the contributory negligence-defense
In response, the financial institutions turned to the contributory negligence-defense enshrined in article 6:101 DCC. They argued that the private individuals had also partially caused their own damage because they had voluntarily entered a contract that clearly centered around the use of borrowed money for investments in the securities market. On 5 June 2009 (ECLI:NL:HR:2009:BH2811, ECLI:NL:HR:2009:BH2815, and ECLI:NL:HR:2009:BH2822), the Dutch Supreme Court decided that, due to their relative share in the cause of the damages, the financial institutions involved were in principle liable for 60% of the residual debt, leaving 40% for the private individuals. Furthermore, the Supreme Court decided that if the financial institution had entered into the contract when it should have known that the borrower lacked the financial capacity to honor its obligations, the financial institution was obliged to cover 60% of the residual debt, as well as 60% of the deposits and interest payments. The Dutch lower courts later developed a system in which financial institutions are in principle obliged to pay two-thirds of the damages.
The 2 September 2016 rulings
In two rulings of 2 September 2016, the Dutch Supreme Court further refined these rules in the case that the financial institution had knowingly violated certain public law obligations on top of its special duty of care. These rulings were based on interim judgments by the Amsterdam Court of Appeal from June 2014 (ECLI:NL:GHSHE:2014:1736; ECLI:NL:GHSHE:2014:1775).
In these cases, Dexia had accepted new clients from a party called Spaar Select. Spaar Select’s main business consisted of connecting potential borrowers with financial institutions. As such, it was exempt from public law authorization requirements for, inter alia, expertise, as long as it did not provide its clients with specific advice. The reason for the exemption was that the financial institutions involved already had the necessary licenses and were ultimately responsible for accepting the clients.
Spaar Select was thus only allowed to give clients general information about the financial products available and connect clients with a financial institution of their choice. However, several private individuals argued that Spaar Select had specifically recommended Dexia’s securities lease contracts. In its interim judgments, the Amsterdam Court of Appeal ordered the individuals to prove (i) that Spaar Select had provided them with advice and (ii) that Dexia knew, or should have known, about this advice.
If this could be proved, the Amsterdam Court of Appeal agreed, Dexia should, under its Dutch public law obligations, have refused to accept these individuals as clients. Therefore, if Dexia knew or should have known about advice provided by Spaar Select but had nevertheless accepted these individuals as clients, Dexia would have committed another tortious act on top of its violation of its special duty of care, and would therefore be liable for 80% of the damages suffered.
The Supreme Court went even further. It ruled that Dexia was responsible for accepting new clients and complying with both its civil law duty of care and its public law obligation not to accept clients from parties without the required permits. It noted that the permit system had been introduced partly to protect private individuals. The Dutch Supreme Court further reiterated an earlier ruling that if private individuals have been provided with specific advice this decreases their responsibility to recognize risks that have not been explicitly pointed out to them. The Dutch Supreme Court ruled that, given the severity of the mistakes made by Dexia relative to those made by the private individuals, the principle of fairness requires Dexia to bear all of the damages. Therefore, if Dexia knew or should have known about advice provided by Spaar Select, Dexia is reasonably obliged to pay 100% of the damages, including any deposits and interest payments. This applies regardless of whether the individual had the financial capacity to enter the securities lease contract. Thus, if the private individuals can prove the necessary facts before the Amsterdam Court of Appeal, Dexia will be obliged to compensate for all of their damages.
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