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Interest rate swaps litigation

In recent years banks have increasingly come under fire in the Netherlands in relation to interest rate swaps sold to small and medium-sized enterprises. The debate has been fuelled by low variable interest rates and higher fees for liquidity and credit default risks. This has given rise to a considerable and ever-growing flow of litigation, which has attracted the attention of the national regulatory authorities1 and the Dutch Parliament. This article examines some of the common client complaints emerging in the litigation, and summarises how the Dutch courts have responded.

Varying grounds of complaints

Interest rate swap litigation in the Netherlands generally involves one or more of the following complaints by investors:

(i) Misinformation about overhedges: The value of the fictional sum for an interest swap is sometimes higher than the actual amount of the loan. In these "overhedge" situations, the client pays the fixed interest on the difference between the fictional sum and the loan amount, but receives variable interest on the same amount from the bank. If the fixed interest rate is higher than the variable interest, clients often claim to have been misinformed about the consequences of overhedges.

(ii) Fees: Swap agreements do not always cover additional amounts which are owed by the client to the bank, such as fees for liquidity or credit default risks. If these fees are not covered by the swap agreement, the client is not secured against fluctuations of these fees. Clients claim to have been unaware of the fact that they were not secured against such fluctuations.

(iii) Early payment: Since a swap is from the underlying loan agreement, termination of the loan agreement does not automatically result in termination of the swap agreement. Payment obligations under a swap agreement remain valid, even where the underlying loan is repaid before the anticipated termination date. Termination before maturity of a swap agreement that has a negative value (ie the fixed interest rate under the swap is higher than the variable interest rate under the loan) requires the client to pay the negative value of the swap for the remaining duration of the swap, plus costs and buy-out penalties in connection with such early termination. As such, clients claim that they were not informed that the swap does not automatically terminate on early repayment of the underlying loan.

Developing in case law

Claimants generally claim (a) termination of the swap agreement on the basis of error (dwaling) or (b) damages based on a breach of the bank's duty of care.

Termination for error

Dutch courts have generally been reluctant to accept claims for termination of a swap agreement on the basis of error. In recent case law, the courts have ruled that information about swaps, provided by banks to their clients, was sufficiently clear about the associated risks.2 Furthermore, the courts have ruled that clients have a responsibility to assess the relevant information and seek specialist advice when entering into swap agreements.3

Breach of duty of care

Central to discussion concerning a bank's duty of care is whether the bank's duty to disclose information about a swap supersedes the client's obligation to investigate, and whether the bank is responsible for warning the client about specific risks related to the swap.

In general, the courts have found that a bank must properly inform the client about the specific characteristics and potential risks of the swap, and the client must make a reasonable effort to understand the swap and request additional information if necessary.4 Circumstances that are relevant in a court's assessment of whether the bank has complied with its duty are: (i) the knowledge and experience of the parties; (ii) whether the swap has been explained by a bank representative in a meeting with the client; and (iii) which party initiated the swap agreement. So, depending on the court's assessment of these factors in any given case, information in swap documentation on, for example, costs and risks, may or may not be sufficient.

There has been an inconsistent approach to how the knowledge and experience of small and medium-sized enterprises is assessed by Dutch courts. Some courts take into account the fact that the client has specialised knowledge in-house or that it has engaged specialist legal advice when entering into the swap agreement, thus leading to the dismissal of the claim or a reduction in damages.5 Other courts argue that small and medium sized enterprises, that are not considered to be a professional client under MiFID, should be treated as a non-professional party from a duty of care perspective. As a consequence, these courts rule that banks have an increased duty of care towards these parties.6 While acting counterparty in a swap transaction does not qualify as offering investment services under MiFID, MiFID concepts are determining the level of duty of care banks should take into account towards clients in swap transactions.

Some Dutch courts qualify the relationship between a bank and its clients as an advisory relationship, even though the swap agreement expressly states that the bank only acted as swap counterparty.7 The courts are ignoring the execution-only relationship between the bank and the client, and assuming an advisory relationship regardless of what was stated in the contract. Previous case law has shown that banks that are advising their clients must act in the interests of those clients.8 This requires a much higher level of care than that required in a counterparty relationship, namely taking the reasonable interests of its clients in to account.


Dutch court decisions on swap arrangements differ in essential respects, such as the assessment of the client's knowledge and experience and the level of the bank's duty of care. Inconsistency in the way that courts have imposed a higher level of duty of care by redefining the relationship between a bank and the client, or assuming a lower level of knowledge and experience for small and medium-sized enterprises, makes it difficult for banks to assess their risk. It is hoped that the Dutch Supreme Court will soon provide some much-needed clarity to this area.


1 In a report published in April 2014, the Financial Market Authority (Autoriteit Financiële Markten) concluded that banks have not always complied with administrative rules and regulations when selling interest rate swaps to clients.
2 See, for example, Court of Appeal Den Bosch 15 April 2014 (ECLI:NL:GHSHE:2014:1052), OR 2014/92, JOR 2014/168.
3 District Court Amsterdam, 10 September 2014, (ECLI:NL:RBAMS:2014:7010); District Court Oost-Brabant 26 March 2014, (ECLI:NL:RBOBR:2014:1415), JOR 2014/167.
4 See, for example District Court Amsterdam 9 April 2014 (ECLI:NL:RBAMS:2014:2280); RF 2014/76, Court of Appeal Den Bosch 15 April 2014 (ECLI:NL:GHSHE:2014:1052), OR 2014/92, JOR 2014/168; District Court Amsterdam 6 August 2014 (ECLI:NL:RBAMS:2014:5019); District Court Amsterdam 27 November 2013 (ECLI:NL:RBAMS:2013:8687) RF 2014/22.
5 District Court Amsterdam 9 April 2014 ECLI:NL:RBAMS:2014:2280, RF 2014/76; District Court Noord-Holland 9 April 2014 (ECLI:NL:RBNHO;2014:3173).

Northern Europe