Lack of legal standing of distributors in claims regarding nullity of sale and purchase agreements
This article examines the issue of lack of standing in claims initiated against financial entities which sold but did not issue financial products. There is a recent trend in Spanish courts in which financial entities which commercialised products have no legal standing in claims in which holders of such products seek a declaration that the purchase agreement was null and void for lack of valid consent.1
The concept of standing means that the individual or entity appearing as defendant must have a connection with the relief sought by the plaintiff.2 In recent finance disputes plaintiffs have sought declarations that investment purchase agreements are null and void on various grounds (eg lack of valid consent due to misselling). Many such claims have been filed, not against the issuer of the product, but instead against the seller. These sellers are normally banks acting as distributors. The reason why so many of these claims have been filed against distributors is that: (i) the issuer is regularly domiciled abroad and there might be problems regarding forum of the dispute, whereas the distributors are domiciled in Spain; (ii) the distributor is more visible to the client; and (iii) the issuer might be insolvent (eg products issued by Lehman Brothers). Recent case law3 has found that a distributor lacks legal standing to be sued in these circumstances. The courts have held that whilst there is a direct contractual nexus between issuer and investor, the distributor acts merely as intermediary.
There are two separate contracts in place:
(i) a sale and purchase agreement between the client and issuer, by which the client acquires the issuer's financial product, and the issuer receives the client's investment; and
(ii) a financial product intermediation contract, in which the distributor intervenes as an intermediary in the sale and purchase agreement but is not a party to it. This is considered to be a "commercial agency" agreement, regulated by Article 244 Spanish Commercial Code.
As the distributor is not a party to the sale and purchase agreement, it cannot be subject to a claim seeking reimbursement of the investment made by the client due to nullity of the intermediation contract or the sale and purchase agreement.4 This case law is based on the theory of the relativity of contracts contained in Article. 1257 of the Spanish Civil Code, by which "contracts shall only be effective between the parties who execute them". The sale and purchase agreement is strictly only entered into between the issuer and the client, a claim for the annulment of this agreement therefore cannot be brought against the distributing entity.
If the client wishes to recover its investment, the annulment claim should be brought against the issuer. Under Article 1,303 of the Spanish Civil Code5 only the annulment of the sale and purchase agreement would entail the repayment of both the capital invested and the interest received. The annulment of the intermediation contract can never entail the repayment of the capital invested, but rather only the repayment of the fee paid by the client to the distributing entity for its role as intermediary.
It must be noted that this case law only relates to nullity claims. A distributor may have to refund the full amount invested by clients in a mis-selling case, in which the plaintiff alleges that mis-selling by the distributor led to the plaintiff suffering losses. This would normally be articulated, under Spanish Law, as a claim for damages linked to contractual liability.
Footnotes
1. Please note this article refers to claims in which plaintiffs merely seek a declaration that the sale and purchase agreement or the intermediation agreement is null and void. Distributors might be found liable under different circumstances.
2. For example, decisions issued by the Spanish Supreme Court on 21 April 2004, 3 October 2002 and 28 February 2002.
3. See the judgments no 780/2014 of Section 3 of the Provincial Court of Navarra of 24 November 2014, the judgment no 2/2015 of the First Instance Court Number 81 of Madrid of 12 January 2015, the judgment no 28/2013 of the First Instance Court Number 2 of Palencia of 22 February 2013, the judgment no 57 of the Provincial Court of Teruel of 10 September 2013, the judgment no 46/14 of Section 6 of the Provincial Court of Pontevedra of 24 January 2014, the judgment no 115/14 of Section 1 of the Provincial Court of Córdoba of 19 March 2014, the judgment no 255 of the First Instance Court of Granada and the judgment of Section 10 of the Provincial Court of Madrid of 1 February 2012.
4. Please note that under this interpretation distributors might be liable under other circumstances (eg if the claimant files an action requesting damages because the distributor acted outside the scope of its authority), but not if the claimants seeks a declaration that the sale and purchase agreement is null and void
5. Article 1,303 of the Spanish Civil Code states that once a contract is declared null and void, the parties shall reciprocally return to one another the things which constituted the subject matter of the contract, with their fruits, and the price, with interest.
