Bank liability for forged transfer orders Luxembourg Supreme Court puts and end to uncertainty on the duty of restitution

Cour de Cassation, No 16/13, 28 February 2013

Against a backdrop of sometimes inconsistent case law, the Luxembourg Supreme Court (Cour de Cassation) has ruled on the duty of restitution of a bank to its customer where the bank has acted on a forged transfer order.

A bank's duty of restitution – conflicting case law Under Luxembourg law, when acting as a custodian (dépositaire) of a client's assets, a bank owes a duty of restitution to the client. This duty of restitution is an absolute obligation (obligation de résultat), ie a bank can only be released from its duty of restitution if it can show that the client is at fault¹ or there has been a force majeure event.

There has been conflicting case law in Luxembourg about to what extent this duty of restitution applies where a bank has transferred a client's funds or securities to a third party on the basis of a forged transfer order. The dominant position of lower Luxembourg courts has been that the duty of restitution does provide a legal basis for imposing an obligation upon the bank to reimburse a client in these circumstances. The absence of any wrongdoing by the bank, or the difficulty in or impossibility of detecting the fraud was not considered to be an adequate defence.² However, there have been decisions that are inconsistent with this approach.³

Facts of this case

In a letter addressed to a bank and apparently emanating from, and signed by a client, the bank was instructed to transfer funds and securities from the client's accounts to accounts held by the client's son. The bank followed the instructions in the letter and duly made the transfers. However, the letter was a forgery. The client commenced proceedings against the bank, asking for a refund of the sums and securities transferred. The expert appointed by the Luxembourg District Court advised that, whilst the signature could seem at first sight "natural and spontaneous", it was indeed forged.

The bank argued inter alia that it should not be held liable for the transfers, because:

• when carrying out a client instruction, the bank is acting as an agent of the client and is only subject to a "best effort" obligation (obligation de moyens). When carrying out a forged client instruction, the bank can therefore only be held liable to the client if the client is able to prove wrongdoing by the bank. The client was not able to show any deliberate or negligent wrongdoing in this case; and
• Article 5.6 of the bank's general terms and conditions contained an exclusion of its liability in cases of fraud: "The bank may not be held liable for the misuse or the fraudulent use of confidential data, be it by the client or a third party".

District Court agrees with the bank

The Luxembourg District Court4 considered that on the one hand, the duty of restitution is indeed an absolute obligation. Therefore, the bank should not be released from its duty of restitution by showing that it is not at fault. On the other hand, when a bank carries out a transfer order on behalf of the client, it acts as an agent and it is only subject to a "best effort" obligation and therefore should be released from its obligation if no wrongdoing is proved. To reconcile these principles, a court should compare any wrongdoing by the bank (if any) with that of the client (if any). In the present case, the District Court concluded that, as the forged signature on the transfer order appeared "natural and spontaneous" there had been no wrongdoing by the bank. In contrast, the client had acted rather carelessly, leaving access to its banking details and access codes to a third party. Therefore, the District Court ruled in favour of the bank.

Court of Appeal agrees with the client and the Supreme Court upholds the decision of the Court of Appeal

The Court of Appeal⁵ overturned the District Court decision, stating that:

• when carrying out a forged transfer order, the bank does not act as an agent of the client because it is not the client's transfer order. Hence, it is solely in its capacity as custodian that the bank's liability should be assessed. When acting as a custodian the bank owes a duty of restitution towards the client. As an absolute obligation, the bank cannot be released from its duty of restitution by showing that it is not at fault. The bank must show that the client is at fault (or that there has been a force majeure event). In the present case, the bank failed to prove any fault of the client.
• Article 5.6 of the bank's general terms and conditions only limits the bank's contractual liability (in relation to the carrying out of a forged transfer order) but does not prevent the client from claiming the restitution of the assets on the basis of the civil law "principles of payment" (Article 1239 of the Civil Code6) and the principle that "who pays wrongly pays twice" (qui paye mal paie deux fois).

The Supreme Court upheld the decision of the Court of Appeal.7

Comment

The Supreme Court's ruling is in line with the major trend of Luxembourg case law and will hopefully end the uncertainty arising from inconsistency in Luxembourg lower court case law.

The Court of Appeal and Supreme Court's ruling on article 1239 of the Civil Code appears to contradict a previous ruling of the Supreme Court in which it considered that Article 1239 of the Civil Code merely defines the performance of the obligation of restitution by payment and does not constitute an autonomous basis of the claim for restitution (ie Article 1239 of the Civil Code cannot base a claim for restitution).⁸

It is also worth noting that the Court of Appeal did not invalidate the limitation of liability clause but merely stated that it does not prevent a claim for restitution. Such clause could be considered as an effective means of limiting contractual liability even though it does not exclude or limit liability for a bank's duty of restitution.

The decision makes it difficult for a custodian to avoid liability where it has carried out a forged transfer order. Possible alternative defences for a bank could be, depending on the circumstances:

• a contractual clause limiting the liability of the bank specifically as regards its duty of restitution (to be tested before courts);⁹ or
• he (tacit) ratification mechanism: if a client fails to report a wrongly carried out transfer order or a transfer that has been carried out without a proper order (such as a forged transfer order) in a timely fashion, pursuant to the (tacit) ratification mechanism, the client is considered as having endorsed the transfer and should be precluded from acting against the bank in relation thereto.

Footnotes

_{1. Some case law suggests that the fault of the client must have the characteristics of a force majeure event.
2. Luxembourg District Court, 14 October 2010, No 10385 and 11599, Luxembourg District Court, 13 July 2010, No 70842
3. Luxembourg District Court, 27 November 2008, No 103486.
4. Luxembourg District Court, 27 November 2008, No 103486.
5. Court of Appeal, 10 February 2010, No 34399.
6. Article 1239 of the Civil Code provides that "payment must be made to the creditor (…)".
7. The Supreme Court did not analyse the scope of Article 5.6 of the terms and conditions as this falls under the exclusive discretion of the lower courts (.e the Court of Appeal) but endorsed the application of Article 1239 of the Civil Code.
8. Luxembourg Supreme Court, 16 March 2000.
9. In a recent ruling, the Luxembourg District Court held that a contractual clause exonerating the bank in respect of the duty of restitution is ineffective (Luxembourg District Court, 4 January 2012, No 139409).}