Banks have a special duty of care with respect to (private) clients. This duty of care was recently applied in cases concerning interest rate swaps. One example of this is the (interim) decision of the Appeal Court of Den Bosch of 15 April 2014, in which the Court ruled that in the context of its duty of care, ABN AMRO should have warned its non-professional, non-private client explicitly, in wording that could not be misunderstood, about the risks associated with an interest rate swap.

The case
In 2006 Holding Westkant B.V. contracted a credit agreement in which ABN AMRO Bank N.V granted it a credit facility of € 560,000 (Euribor loan for the term of ten years). Shortly thereafter ABN AMRO concluded an interest rate swap contract with the appellant. In 2009 Westkant terminated the credit agreement when it switched to a different bank. ABN AMRO claimed that the premature termination of the interest rate swap meant that Westkant was required to pay € 60,000. Westkant took the position that it was not required to pay this sum because ABN AMRO had failed to satisfy its duty of care.

Appeal Court
The Appeal Court found that an interest rate swap is a complex financial instrument which involves significant risks. If, after an interest rate swap has been concluded, the interest rate drops sharply, as was the case in 2008 because of the financial crisis, the interest rate swap takes on a substantially negative value for the client. Terminating the interest rate swap agreement before its term has expired results in unexpectedly high costs in that case. In the context of its duty of care, ABN AMRO should have warned Westkant about these risks insistently enough (i.e.: explicitly and in terms that could not have been misunderstood). ABN AMRO should also have ascertained whether Westkant was aware of the particular risks associated with an interest rate swap and the consequences that the manifestation of these risks could have for it.

The special duty of care also means that ABN AMRO should have advised Westkant on a suitable financial instrument. Since the interest rate swap is a complex and risky instrument, ABN AMRO should have acquainted itself in depth with Westkant’s financial position, knowledge, experience, objectives and risk appetite and it should have tailored its advice to the client profile thus obtained (the ‘know-your-client principle’). In the continuation of this case Westkant will have to prove ABN AMRO’s failure to satisfy its duty of care (the violation of its duty to warn and its incorrect advice).

A bank’s duty of care
A bank’s duty of care stems both from the law and from case law. On grounds of the law, a provider of services (and therefore also a bank) must exercise the care of a good provider of services in the conduct of its work. A bank must therefore exercise the due care towards its clients that can be expected of a reasonably competent adviser acting reasonably in the given circumstances. The Financial Supervision Act also includes a duty of care towards clients specifically for banks.

In case law it is assumed that banks have a special duty of care towards clients because of their social function (based on the contractual relationship with the clients). A bank that advises a private person on an (investment) product has a special duty of care to protect that person against the risks of his own imprudence or lack of insight. This duty of care implies, among other things, that the bank must investigate in advance its client’s financial possibilities, expertise and objectives. The bank must also warn its client about the particular risks associated with a construction and the fact that an (investment) strategy proposed or applied by the client is not consistent with his financial possibilities or objectives, his risk appetite or his expertise. The client may in principle assume that the bank will satisfy this special duty of care towards him because a bank is a professional and pre-eminently expert service provider, while the (private) client usually lacks such professionalism and expertise.

A bank’s obligations to exercise special care with respect to its client and the requirements that may be imposed on a good provider of services can mean that a bank is required to satisfy a duty of care that goes further than that arising from the public-law regulations, including the Financial Supervision Act. Specifically it has been stipulated in case law that the public-law duty of care does influence the private-law duty of care, but does not determine it.

Banks have a special duty of care with respect to their clients. It is an important that a bank knows its client very well. The bank must warn its client about risks explicitly and in words that cannot be misunderstood. If the bank fails to do this, it can cost it dearly. It can even go so far as the losses being passed on to the bank.

By Floris Pels Rijcken