Federal Court of Justice on causation claims for breach of duty

December 2012

The Federal Court of Justice has altered its position on the allocation of the burden of proof in cases in which an investor makes a claim against a bank for a breach of a duty to inform.

Federal Court of Justice, 8 May 2012, file No XI ZR 262/10

The decision also contains some useful guidelines as to which arguments could help banks in cases where the investor makes claims for not being informed about kickback-payments which the bank receives from third parties (in particular the issuer of the product) to rebut the presumption that its failure to inform the investor caused the investor's loss.

In this case decided by the Federal Court of Justice the bank had not disclosed a payment which it had received from the issuer on the investment which the investor purchased. The prospectus had mentioned the payment but not the recipients so that the investor had not known of either the existence or the extent of the profit that the bank had received from selling the investment.

The German courts have previously held that this constitutes a breach of the bank's duty to inform the investor (see the November 2010 edition of the European Finance Litigation Review). However, a bank can only be held liable if the investor has also suffered a loss and there is a causal link between the breach of duty and that loss, ie that the bank's incorrect or incomplete information must have caused the investor's decision to buy the investment. The court therefore examined whether the investor would have bought the investment had the bank provided the correct and complete information.

Due to the difficulties in assessing this type of hypothetical question, the outcome of such a causation issue often depends on the allocation of the burden of proof. The banking senate of the Federal Court of Justice holds the view that the party who has breached a duty to inform must prove that the loss would also have occurred even if it had met its obligation. In mis-selling cases the bank must therefore show that the investor would have ignored the information and brought the investment anyway.

It used to be the case that the burden of proof fell on the investor where there was more than one available course of action available to him had he received the correct information. This could be reversed, so that the burden of proof fell on the party who had breached a duty to inform, but only on the precondition that the investor had only one reasonable course of action available had he been provided with correct and complete information.

Now the court has found that this precondition for the reversal of the burden of proof onto the party who has breached a duty to inform no longer applies. The reversal of the burden of proof to the bank now applies regardless of how many reasonable courses of action are open to the investor. This means that the bank must prove that the information was irrelevant for the investor when deciding to buy the investment if a court finds that a bank has breached a duty to inform an investor.

The Federal Court of Justice also provided some helpful guidelines as to which arguments could qualify as circumstantial evidence and help to rebut the presumption. In cases in which investors raise claims about not being informed about a kickback-payment which the bank receives for the sale of the investment, it can be relevant that the investor purchased a similar investment knowing of such a payment.

The same applies if the investor learns about such a payment with regard to another investment after he purchased it, but did not raise any claims on that basis. The court furthermore recognised that it could also be circumstantial evidence if the type of investment in which the investor is interested can only be achieved by the acquired product or products for which the bank would have received a similar payment.

Comment

At first glance, this decision is not very helpful for banks as it shifts the burden of proof for the investor's hypothetical conduct to the bank and dispenses with the exceptions that the courts previously recognised.

However, the court's comments as to how banks can show that there was no causal link between its breach of duty and the investor's decision to acquire the respective product are very helpful, as it will make it much more difficult for courts to disregard a bank's argument that a claimant's behaviour in a particular case is inconsistent with his behaviour with regard to other investments.