In Banque Rivaud v Vachellerie (July 3 2001) the Cour de Cassation (the French Supreme Court) issued important recommendations regarding the information obligations that credit institutions owe their clients.
Banque Rivaud granted a loan to Mr and Mrs Vachellerie to enable them to purchase interests in a ship. They made this investment in order to benefit from certain tax advantages. The bank was neither a party to the investment transaction nor responsible for managing it, but was fully aware of the purpose of the loan and of the nature of the transaction financed.
When granting this loan in 1988 the bank was also aware of a warning that the Commission des Opérations de Bourse (COB) had made public in 1985. According to the COB this type of investment was not profitable, for the funds invested might not be totally recovered and would certainly be excluded from any kind of favourable tax treatment by the French tax administration. Banque Rivaud did not inform its clients of this warning.
After the borrowers defaulted on several loan repayments the bank instituted proceedings against them. The borrowers then invoked the nullity of the loan agreement.
The Cour de Cassation ruled in favour of the borrowers, declaring that the loan was void because their consent had been vitiated by the bank's failure to tell them of the COB's warning, thereby breaching its information obligations. According to the court the COB's warning was likely to deter anyone from making such an investment. Should the borrowers have been informed of it they would probably not have contracted the loan. Knowing the purpose of the loan, it was the bank's duty to provide them with this type of information.
Case law has already imposed on financial intermediaries (whether a credit institution or an investment firm) the obligation to assess the degree of their clients' knowledge and to inform them of the risks incurred, especially when entering into speculative transactions (eg, transactions on futures markets and conditional transactions) (see, Karouby v Bonnasse Lyonnaise de Banque, May 22 2001, Cour de Cassation).
However, the bank did not act as an intermediary, but merely granted the loan necessary to the investment. In such a case French courts do not usually oblige banks to assess the opportunity of the credit granted, and have traditionally exempted them from any liability in the event that the investment did not benefit from the tax treatment sought by the borrowers (see, Fredouille v Comptoir des Entrepreneurs, November 18 1997, Cour de Cassation).
The Cour de Cassation has nonetheless considered that the bank's information obligations included the obligation to disclose the COB's warning to its clients, on the grounds that such information would have deterred them from making the contemplated investment and, subsequently, from contracting the loan. In addition, the court qualified the bank's silence as a misrepresentation that had vitiated the borrowers' consent, and therefore held that the loan was void. However, the Cour de Cassation did not take into consideration the fact that the COB's warning had been made public and could therefore have been read by the borrowers at any time.
For further information on this topic please contact Philippe Portier or Raphaële Navelet at Jeantet & Associés by telephone (+33 1 45 05 81 96) or by fax (+33 1 47 04 87 98) or by email ([email protected] or [email protected]).