The duty of care of banks has been a hot topic in the Netherlands for quite some time. Although under Dutch law all contract parties have a regular duty of care towards each other, under certain circumstances a ‘special duty of care’ may apply for banks. This special duty of care applies only towards private persons and in case of high-risk investment products.
On 26 March 2014, the District Court of Oost-Brabant delivered a judgment in which it appears to stretch the boundaries of the special duty of care, in particular relating to derivatives and SME clients. This case concerned a dairy farmer who had obtained financing from Rabobank. In 2008, he entered into an interest swap agreement with Rabobank, exchanging his floating interest rate for a fixed interest rate. In 2010, the dairy farmer notified Rabobank that he was planning to emigrate. For the mid-term termination of the interest rate swap he incurred a premium of €275,000. He paid the premium but subsequently lodged a claim against Rabobank, stating, among other things, that the bank had violated a special duty of care towards him and was therefore liable to pay damages.
The court ruled that a special duty of care does not solely apply to private persons. It stated that the bank could not reasonably assume that the dairy farmer, having no experience with financial derivatives, fully understood the risks of an interest rate swap. Furthermore, the judge found that Rabobank had the obligation to inform its client in no uncertain terms about the risks of the product, and furthermore had an obligation to check whether the client was actually aware of the risks involved. Rabobank was therefore found liable to pay damages. However, 40 percent of the damages were to be borne by the farmer on the basis of contributory negligence on his part. He should have made sufficient effort to understand the product. Lastly, he should have known that the decision to emigrate could impact his financial obligations towards Rabobank under the interest rate swap.
COMMENT ON RULING
The ruling on the special duty of care towards non-private- persons seems contrary to the previous decisions of the Dutch Supreme Court and has therefore been met with a critical response by banks as well as scholars. Based on MiFiD and its Dutch legislative counterpart stipulation in the Financial Supervision Act, a warning with regard to risks may be given in standardized form. In this case, the court effectively ruled that this was not sufficient. It is debatable whether the Dutch court has the authority to deviate from MiFiD in this way, considering that MiFiD seeks maximum harmonization.
As many SMEs in the Netherlands have entered into interest rate swaps, it is expected that more decisions on this topic will follow.