An extract from The Securities Litigation Review, 7th Edition
Private enforcementi Forms of action
In Portugal, private enforcement securities actions are typically brought by investors for contractual or non-contractual liability or seeking the annulment of contracts.
In liability claims, investors usually claim compensation for damages, arguing that the financial institution did not comply with its information duties. In these cases, the plaintiffs must allege and prove that: (1) no information was provided or that the information provided was inaccurate or insufficient through the fault or negligence of the financial institution;4 (2) they suffered real and actual damages; and (3) the damages were caused by inaccurate or insufficient information or a lack of information.5
In actions for annulment of contracts, investors commonly argue that there was an error regarding the nature and risks of the contract or an abnormal change of circumstances. Should the plaintiffs prevail, these actions result in the annulment of the contract and, consequently, in the mutual restitution by the parties of the corresponding consideration exchanged.
The defence in securities litigation matters is generally grounded on the adequacy of the product to the investor's profile, the information provided during the sale, the specific documentation signed by the investor and the information made available after the contracting process.
The statement of defence of the financial institutions usually focuses on, first, proving that all the duties of information were duly complied with, and second, that the institution acted as a mere financial intermediary, without any private interest in the transaction. Financial institutions claim that the investors fully understood the transaction, were not in error regarding the nature and risks of the contract and argue that the contracts are valid pursuant to Portuguese law. Additionally, financial institutions argue that the financial crisis or the sharp fall in interest rates do not qualify as abnormal changes of circumstances. Financial institutions commonly invoke multiple objections, such as statutes of limitation of civil liability, abuse of rights and the existence of an arbitration agreement.
The Securities Code explicitly grants standing to non-qualified investors, associations for the defence of investors and foundations created for the protection of investors to bring class actions for the protection of collective or individual homogeneous interests of non-qualified investors in financial instruments. If the financial institution is found liable for damages in the class action, it must indicate the entity – a guarantee fund, an association for the defence of investors or one or more of the investors identified in the action – that will be in charge of receiving and managing the compensation due to all investors that could not be individually identified.ii Procedure
Civil judicial proceedings are initiated by means of a written petition. The plaintiff must argue the material facts constituting the cause of action. For example, if the claim seeks compensation on the grounds of breach of information duties, the plaintiff must allege that the financial institution did not comply with the corresponding duties,6 that the financial institution acted with fault or negligence, that those circumstances resulted in damages to the plaintiff, and, lastly, that there exists a causal link between the damages and the breach of information duties.
In claims pertaining to the mis-selling of securities, the decision as to who bears the burden of proof regarding the fulfilment of information duties is particularly important. In a 2017 ruling concerning an interest-rate-swap agreement, the Portuguese Supreme Court, contradicting the majority of Portuguese jurisprudence, ruled that, according to the regime on general contractual clauses, the burden of proving that the bank complied with its information duties rested with the bank itself. This understanding was further confirmed in a ruling of the same court on 26 March 2019.7 However, in a ruling issued on 7 November 2019, the Supreme Court once again considered that it is the claimant who must prove that the financial intermediary did not comply with its information duties.8
In this context, it should also be noted that Portuguese courts have mostly held that in mis-selling claims the claimant must prove the cause–effect relationship between the breach of duties and the damages suffered. This usually amounts to proving that the claimant would not have bought the financial products if the bank had complied with its duties, which may be difficult to prove, thus leading to many claims against financial institutions being rejected. In recent years, certain decisions from the Courts of Appeal have argued that this cause–effect relationship should be presumed, and hence the burden of proving that the relationship did not exist lies with the financial intermediaries. Although such a presumption would certainly be a game changer in most mis-selling claims, the Portuguese Supreme Court has upheld and restated its previous jurisprudence, stating that there is no such presumption.9
Subsequently, the defendant must present its defence, either asserting that the facts alleged by the plaintiff are not true, do not produce the consequences claimed by the plaintiff or that the plaintiff's petition must be dismissed for some other circumstance, such as a legal objection. For instance, the defendant may argue that it did, in fact, provide all information required by law or that the plaintiff's petition for compensation must be dismissed because of the statute of limitations. The defendant may file a cross-complaint, in which case the plaintiff may reply. The plaintiff and the defendants must file their requests for evidence along with the legal briefs.
In civil proceedings, parties having the burden of proof are required to disclose documents and information that support their claims or defence. Unlike the common law system, Portuguese law does not provide for a disclosure or discovery phase. Further, Portugal lodged a reservation to the Hague Convention with regard to the taking of evidence in civil and commercial matters, declaring that it will not execute letters of request issued for the purpose of obtaining pretrial discovery of documents as practised in common law countries. Notwithstanding, the parties may request that the court orders that certain documents in the possession of the counterparty or of a third party are produced to prove facts alleged in the proceedings, which the court may do if it deems them relevant to the dispute.
The pleadings phase is usually followed by a preliminary hearing in which procedural matters are discussed by the parties and decided upon by the judge. The parties may change their requests for evidence in the preliminary hearing. The judge may order specific documents to be presented by the parties or by third parties and may order expert reports to be made. The judge should also schedule the trial dates.
Witnesses and experts are examined at the trial hearing. Subsequently, the parties present their closing arguments and the court issues the final decision. In litigation involving sums exceeding €5,000, the decision may be appealed.
In addition, in recent years, arbitration proceedings related to securities litigation have increased. Portuguese arbitral proceedings tend not to differ significantly from judicial proceedings, which is to say that they usually have the same procedural phases as the former (i.e., a pleadings phase, followed by a preliminary hearing and, subsequently, by the trial hearing).iii Settlements
Under Portuguese law, the parties may reach a settlement at any stage, provided that it does not affect inalienable rights. The claimant may also, at any time, waive its claim.
If a court settlement is reached, the agreement must be judicially approved. The court will verify whether the settlement is valid and whether the signatories have sufficient powers to execute it.
Under Portuguese law, there are no mandatory rules governing the payment of attorneys' fees pursuant to a settlement. Judicial fees are usually borne by both parties in equal shares and each party bears its own attorneys' fees.iv Damages and remedies
Pursuant to the Portuguese Civil Code, whoever causes damage to another person through wilful misconduct or negligence may be subject to contractual or non-contractual liability and, consequently, be ordered to pay compensation for damages.
In securities litigation, damages usually refer to the losses suffered by the investor. For example, if the investor purchased bonds that lost their value because the issuer became insolvent, the financial intermediary could be ordered to pay the price of the bonds. In litigation relating to an interest-rate-swap agreement, the financial institution could be ordered to pay the negative financial flows of the swap agreement.
Other common remedies sought by investors include the annulment of the contract, the termination of the contract and barring the financial institution from initiating enforcement proceedings, charging bank accounts or registering the debt in the Central Credit Register.
Civil liability may also be sought through criminal proceedings. In fact, civil liability may be acknowledged and decided by the criminal courts when deciding a criminal case.