In a recent landmark judgment (3 June 2014, XI ZR 147/12), the banking law senate of the German Supreme Court stipulates far-reaching disclosure obligations for banks (active in Germany) with respect to internal commission payments for investments. While the country’s banks are obliged to inform their clients of such "hidden" internal commission payments as of 1 August 2014, they will not be held liable for not having disclosed such commission payments in the past. The German Supreme Court's decision will certainly have an immediate impact also in Austria.
As to the underlying facts of this landmark case, the bank had provided the claimant with advice on a real estate investment in 1996. The seller of the properties paid the bank a commission amounting to around EUR 700,000, (or ca. 5 % of the investment volume) for having helped bring about the deal. The bank did not disclose the commission payment to the claimant. Germany’s Supreme Court (BGH) addressed the claimant’s accusation that the bank advising him had acted wrongly in not informing him of the volume of that payment.
Up to this ruling, the German Supreme Court had when addressing disclosure obligations distinguished strictly between "kickbacks" (Rückvergütungen) and mere "internal commission payments" (Innenprovisionen).
Kickbacks: The bank discloses that the investment sum contains a commission payment to a third party. However, the bank remains silent about the fact that this third party will deliver some portion of the commission payment back to the bank ("kick back"). Already in its existing jurisprudence, the German Supreme Court had stipulated that banks are obliged to disclose such kickback payments: Without this information, the investor would not be able to realize the bank's conflict of interest in the investment deal.
Internal commission payments: An internal commission payment can be assumed to occur when the bank receives a commission payment from a third party. The difference to kickbacks is that the investment documentation does not contain any reference that there are commission payments connected with the investment.
Until now, it was only clear that banks were obliged to disclose such internal commission payments if the payment was financed from the investment and exceeded 15 % of that investment sum (see most recently German Supreme Court decision 3 March 2011, III ZR 170/10). Leaving the investor ignorant about such a high commission payment would mean that the investor could not accurately perceive his investment's real value. For this reason, explicitly informing the investor about the commission payment is necessary in such situations.
For internal commission payments of a lower amount, the question of whether banks shall equally be obliged to disclose the receipt of such payments was strongly debated in literature and in judgments of lower instance courts. In its recent judgment, the German Supreme Court abstained from providing a final answer to this debated question (at least for those cases that pertain to the past). Nevertheless, the Court held that if the bank would have been obliged to disclose the payment even before 1 August 2014, the bank could not be fairly blamed for having violated this duty: Due to the then pending legal uncertainty, banks may successfully plead an unavoidable mistake of law which exculpates them from civil liability for violations of disclosure obligations in this period.
The core message of the judgment is that the German Supreme Court's ruling places a duty on banks to disclose internal commission payments (regardless of their value) as of 1 August 2014. The Supreme Court infers this duty not explicitly from a conflict of interest on the banks' side (such as it did for kickbacks), but instead refers to the broad extension of financial supervisory legislation over the course of the past few years (with 1 August 2014 as a current peak, with another important supervisory law entering into force at the same time). Given this legal concept of transparency in the banking sector, the Court argues that investors could duly expect banks to disclose all internal commission payments, regardless of their value.
What the German ruling is likely to mean for Austria
The German Supreme Court's decision could have an immediate impact in Austria. Besides the extended obligation to disclose internal commission payments, the judgment will also pave new ways for pleading excusable mistakes of law in Austrian civil proceedings dealing with different, but similar information disclosure obligations.
Take, for example, the "negative market value" of a derivative product: In its 2011 landmark judgment (22 March 2011, XI ZR 33/10), the German Supreme Court enacted a duty for banks to disclose information regarding a derivate product’s initial negative market value. Since prior to this 2011 judgment, it was not at all clear that such a duty indeed existed, one could already justifiably ask how banks shall be blamed for having neglected a duty they could not know about. In its 2011 judgment, the German Supreme Court had not yet elaborated on the potential applicability of an excusable mistake of law, due to the respondent party's failure to bring this point, but explicitly left the door open to this line of argument.
As outlined, the German Supreme Court has now taken a strong stance on the mistake of law argument and confirmed that if the legal situation had been too unclear, a mistake of law would exonerate the accused party from civil liability because the mistake was unavoidable. The same principle also applies in Austrian civil law: Ignorance of the law is only then no excuse when presumed knowledge of the law is indeed reasonable. This makes for very interesting news for all pending derivative litigations in Austria!