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Banks must disclose margin arrangements in hedging operations

Paris Court of Appeal, Sté SARL Société Minière Georges Montagnat (S.M.G.M.) v SA Société Générale, 26 September 2013, RG No 11/19539

The Paris Court of Appeal has defined the scope of a bank's so-called "duty to inform" and "duty to advise" in hedging transactions.

In 2005 mineral producing company, Société Minière Georges Montagnat (SMGM) opened several hedging positions for nickel with Société Générale. Whilst the price of nickel was increasing at that time, the hedges were purchased to protect SMGM against a price decrease. SMGM purchased a "put option" which would be activated if the price of nickel decreased under a given threshold; there was a corresponding "call option" to Société Générale, which would be activated if the price of nickel increased over a certain threshold.

The advantage for SMGM in combining the put and call options, was that SMGM did not have to pay any premium to Société Générale (nor did it pay any commission fee) as the two transactions in effect cancelled each other out. However, when the price of nickel drastically increased beyond all expectations in 2007, Société Générale made a substantial profit as it was directly remunerated from the cover operations set up for SMGM. SMGM sued the bank, requesting that (i) the hedging contracts be declared null and void on the basis of wilful misrepresentation (by the bank not having revealed the nature of its sales margin) and mistake (on the real risks in case of increase or decrease of the price of nickel); and (ii) in the alternative, damages be awarded on the basis of the alleged breach by Société Générale of its duties to warn, advise and inform SMGM.

No wilful misrepresentation or mistake

The Court held that there was no wilful misrepresentation or mistake. There was no evidence of malicious intent and therefore no wilful misrepresentation. There had been no mistake by SMGM as the representatives of SMGM had asked all of the questions necessary to understand the global operation and repeatedly acknowledged in writing and orally that it had sufficient knowledge to make an informed choice between different hedging tools. The Court further noted that no one could have anticipated the drastic 2007 nickel price increase.

Contractual duties to warn, advise and inform Under French law, a bank has a duty to specifically warn a non-professional client of the risks associated with entering into a transaction that is speculative. In this case, the Court held that the bank did not have any duty to warn SMGM since the hedging operations were not speculative by nature because the transactions were not aimed at achieving profit based on predicting market trends, but instead were aimed at reducing loss (in the case of market and price changes). As such, there was no duty to warn which could have been breached.

The importance of this ruling is the Court's reasoning on the bank's duty to inform its client (ie to provide the client with general and abstract information on the transaction envisaged) and to advise it (ie to advise the client as to what the best transaction structure or restructuring was in view of the very specific circumstances of the case). The Court held that the bank "has a duty to inform its client on the manner in which it will pay itself" and that this is true "even in the context of an operation with no premium" on the basis that a bank needs to act in a loyal and transparent manner. According to the Court, Société Générale had not complied with this duty nor had it complied with its duty to advise SMGM since it had not proposed solutions in SMGM's best interests. For example it had not informed SMGM of a "dry option strategy" (which would have allowed SMGM to sell nickel at a minimum guaranteed rate) or of its rights to terminate the coverage contracts.

The Court of Appeal ordered Société Générale to pay USD 9 million to SMGM. This quantification of damages was based on the loss of a chance not to have negotiated a better hedging position, although the Court notes that Société Générale could not have anticipated the exceptional price increase of 2007. It is not entirely clear from this ruling whether this amount was ordered to be paid for the Bank's breach of a duty to inform in relation to its remuneration or in relation to its duty to advise about hedging options.


This ruling imposes a stronger obligation on banks as to the information and advice due to their clients in the case of hedging operations where their remuneration does not stem from a direct payment by their clients. From now on, banks will have to communicate their sales margin even where it is more indirect in nature (such as a gain from a hedge). It remains to be seen whether this ruling would be confirmed by the Supreme Court (in the case of an appeal before the Supreme Court) as sales margins in this context were traditionally considered to qualify as a business secret.1 

Further information

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1. Paris Court of Appeal, 26 September 2013, comment by J.-J. Daigre in Banque & Droit No 152, Nov-Dec 2013, page 24.

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