Contract provisions

Types of contract

Describe the various types of private banking and wealth management contracts and their main features.

Private banking and wealth management services may entail various contracts depending on the products, services and intermediaries involved. Typically, the contractual relationship between a customer and a bank or manager is somewhat one-sided, in favour of the institution. However, under federal law, banks are required to disclose or provide notice of the key terms and features for a customer’s accounts or products. Such disclosures may include deposit agreement terms, loan terms and related disclosures for electronic banking and ATM usage, among others.

For investment advisers, certain contractual terms are prohibited, for example, assignment without the client’s consent. Additionally, the contract language cannot waive compliance with the rights or rules under the Advisers Act. Similarly, a customer cannot contractually waive his or her rights or duties owed under the 1934 Act. Also, broker-dealers that are members of FINRA must arbitrate disputes with customers before FINRA panels (FINRA has its own code of rules for arbitration).

Liability standard

What is the liability standard provided for by law? Can it be varied by contract and what is the customary negotiated liability standard in your jurisdiction?

Contract liability

A financial institution that breaches its agreement with a client may be liable for actual damages occurring as a result of the breach, provided that the damages were (i) foreseeable (that is, reasonably contemplated by the parties) at the time of contracting; (ii) proven with reasonable certainty; and (iii) proven by a preponderance (more than 50 per cent) of the evidence. Punitive damages generally are not available for breach of contract. In New York, punitive damages may be available for breach of contract if the breach was aimed at the public generally and involved particularly egregious misconduct. A contract may select the body of law to be applied, as well as the court (venue) in which the dispute will be resolved, and typically will be permitted to select arbitration as an alternative to judicial adjudication, but cannot vary the liability standard. A contract may, however, agree on the amount of applicable damages (known as liquidated damages) if (i) the amount of damages would be uncertain if damages had to be proven; and (ii) the amount selected is reasonable. A contract can also provide for a waiver of consequential damages (ie, damages that do not arise directly from the breach) and incidental damages arising from a breach, or may include a cap on contractual damages. Damages arising from a breach may be offset if the customer recovers from other sources (eg, insurance).

Tort liability

Under (typically state) common law, all types of financial institutions typically can be held liable to their clients for their negligence. Negligence is the failure to use reasonable care, which results in damage to a client.

In some instances, an institution may be permitted, by contract, to limit its liability to customers to those cases involving gross negligence or wilful misconduct. Gross negligence is serious carelessness and involves a voluntary, conscious disregard of the need to use reasonable care that is likely to cause foreseeable grave harm to persons or property. Wilful misconduct requires proof of knowledge or intent by the institution to engage in wrongdoing (eg, fraud, conversion (civil theft), or other intentional torts).

Wilful misconduct can result in the imposition of punitive damages. In many states, gross negligence can also result in the imposition of punitive damages. In some instances, an institution may be permitted, by contract, to preclude punitive damages, but as a matter of public policy, many courts will not enforce such limitations on punitive damages in cases of wilful misconduct or gross negligence.

Broker-dealers, custodians, investment advisers, and others with relationships of trust with their clients (which may occur in the private banking context) typically owe their clients a fiduciary duty, and may be liable to their clients for breach of fiduciary duty. A fiduciary duty is the highest standard of care. It typically includes obligations of good faith, fair dealing and loyalty. Damages for a breach of fiduciary duty may include any amounts necessary to make the client whole and, typically in cases involving evidence of egregious misconduct, may include punitive damages. A financial institution that breaches its fiduciary duty may also be required to account (providing accounting details) to help the client trace his or her money and assess his or her damages.

Statutory liability

Statutes (typically federal) may also impose liability on institutions in specific contexts. For example, broker-dealers must fulfil an obligation of suitability to their customers: they must reasonably believe that their recommendations are in the best interests of the customer. Additionally, broker-dealers and investment advisers have a duty of best execution; that is, they must seek the best execution reasonably available for their customers’ orders.

Mandatory legal provisions

Are any mandatory provisions imposed by law or regulation in private banking or wealth management contracts? Are there any mandatory requirements for any disclosure, notice, form or content of any of the private banking contract documentation?

See question 37. Broker-dealers, investment advisers and insurance companies must generally give privacy notices (as banks do) and there may also be product-specific notices required by law.

Limitation period

What is the applicable limitation period for claims under a private banking or wealth management contract? Can the limitation period be varied contractually? How can the limitation period be tolled or waived?

Contracts are generally governed by state law and statutes of limitations vary by state. For instance, in New York, the statute of limitations for contracts is six years. At times, statutes of limitation are also specified in federal law. For instance, for SEC enforcement actions, the statute of limitations is five years from the date of the violation (in the case of a private right of action, it may be two years after the discovery of the facts constituting the violation).