Duty of care and the COVID-19 emergency: obligations and legal consequences for Dutch banks

There is a clear trend in the Dutch markets towards an increase of special duty-of-care obligations for financial institutions including banks. Due to the Covid-19 outbreak and emergency, it is very likely that many commercial parties – and potentially also consumers – will get into financial difficulties.

Dutch banks are already showing flexibility towards their clients and the government is also supporting companies (see our recent insight). But even under normal circumstances banks have a duty of care towards their clients. This may become especially relevant if their clients are in financial distress.

Public law

Pursuant to the public law Dutch Financial Supervision Act (FSA), Dutch banks are subject to supervision by the Dutch Central Bank (De Nederlandsche Bank) and the Dutch Authority for the Financial Markets (Autoriteit Financiele Markten) (AFM). Banks are furthermore under the supervision of the European Central Bank and subject to European financial market regulations. These rules apply either directly or by implementation in local law, such as the FSA or policies/regulations in relation to that.

The European Markets in Financial Instruments Directive II (MIFID II) is, for instance, an important regulatory framework that consists of a mix of regulation, the Markets in Financial Instruments Regulation (MiFIR), which are rules that apply directly, and a directive that has been implemented in the FSA. Under this regulatory framework banks are, among others, subject to behavioural rules (gedragsregels). For instance, the know-your-client principles protect consumers against risks such as over-crediting or loss of investments. But also the Money Laundering and Terrorist Financing (Prevention) Act (WWFT) can create an obligation for a bank to take action to protect third parties. In particular, if the bank has reasons to assume on the basis of WWFT information that a customer could cause harm to third parties.

The FSA has specific provisions including obligations to provide sufficient (and clear) information to consumers when offering financial services and/or products (for example, Section 4:20 FSA). Or the rule that financial service providers should carefully consider the interests of the consumer or beneficiary when entering into contracts with them (e.g. 4:24a FSA). These rules apply mainly for consumers, but discussions are taking place to broaden the scope to smaller professionals as well (such as freelancers and SME's).

In case of non-compliance with the FSA, the AFM can take enforcement measures against banks, such as imposing a fine. Civil parties cannot make any claims under public laws, but a breach of public law can form a basis for a claim in a civil law procedure as well. This is why the duty of care as developed under case law is a bit of a mix of public and civil law rules and principles.

Civil law

The special duty of care of banks towards their clients is in part based on unwritten principles developed in Dutch case law and on contract. Without trying to be exhaustive, the following sources are the most relevant for Dutch banks (in addition to specific provisions in the agreements with their clients of course).

Case law

In case law the role of banks in society (maatschappelijke functie), their position as professional service providers with specific areas of expertise, in combination with obligations following from private and public law, lead to a special duty of care obligation for banks towards their clients and in some cases also towards third parties. From recent case law it also appears that this duty of care needs to be taken into account towards the more professional (third) parties (see for instance ECLI:NL:GHDHA:2018:2417 (RBS/ISG) and ECLI:NL:GHAMS:2019:1611 (Footlocker/ING)).

However, there seems to be a shift in emphasis on to the professionalism and expertise of the parties rather than their specific role in society (which has widened the scope to include non-banks as well). The level of the duty of care depends on the complexity of the product, the type of product (and applicable rule) and the expertise and experience of the relevant client. Also towards third parties, a bank has an obligation to protect such parties against their own frivolousness and lack of ability.

At a high level there are two kinds of duty of care: (i) the obligation to know, warn and inform your customer, so, for example, making sure a client understands the product and checking financial background and situation of clients; and (ii) the obligation not to provide certain products to consumers, for example, over-crediting, risky option trades, share lease products, etc.

The duty of care was initially developed for consumer protection. In the Dutch market, however, banks have been criticised and sued for selling interest-hedging products to small and medium-sized enterprises and semi-governmental organisations that have led to serious financial difficulties for those parties. Although there is no conclusive ruling yet from the Dutch Supreme Court, there seems to be a consensus that some levels of duty of care should also apply to banks when dealing with a range of non-consumers.

Pre-contractual phase: wrongful act

In the pre-contractual phase (before the contract is actually signed) the breach of a duty of care can qualify as a wrongful act (section 6:162 of the Dutch Civil Code (DCC)) due a breach of laws or an unwritten standard of care (ongeschreven zorgvuldigheidsnorm). Also the breach of public law can lead to liability on the basis of a wrongful act, whether before or during a contractual phase.

Duty of care for service providers

The DCC also includes a general duty of care for service providers / contractors that are a party to a service/contractor agreement (overeenkomst van opdracht) (section 7:401 DCC). This provision includes the following basic rule: "The contractor must exercise the care of a good contractor when performing his work/service." This open norm is however more relevant for services than for loan agreements, given the nature of the contracts to which this applies.

Principles of reasonableness and fairness

Section 6:248 DCC includes the Dutch law principle that a contract party should always comply with the principle of reasonableness and fairness (redelijkheid en billijkheid). This can mean a party (i) must do something in addition to its contractual obligations or (ii) refrain from exercising certain contractual rights. This overarching principle applies to all Dutch law governed contracts.

Under section 6:248(1) DCC an agreement not only has the legal effects that parties have agreed upon, but also those which, arise from the nature of the agreement, from law, usage (common practice) or the standards of reasonableness and fairness. This means that even if a contract does not include any duty of care, a bank can still be bound by an (implied) duty of care.

Section 6:248(2) DCC is relevant when lenders exercise their rights. The informal translation of this section is: "A rule, to be observed by parties as a result of their agreement, is not applicable insofar this, given the circumstances, would be unacceptable to standards of reasonableness and fairness". An example is, for instance, the contractual right of a lender to terminate the loan and to make all outstanding amounts immediately due and payable. Doing so without any warning or notice would not be enforceable due to the principle of reasonableness and fairness. In general, the threshold for something to be "unacceptable" is quite high however.

Covid-19 creates such a special situation that this cannot be ignored when applying the principles of reasonableness and fairness. However, reasonableness and fairness are not a cure for all problems.

Dutch Banking Association

In the Netherlands the banking sector is represented by the Dutch Banking Association (Nederlandse Vereniging van Banken) (NVB). Almost all banks that are active in the Netherlands, including branches of foreign banks, are members of the NVB. The NVB has issued general banking terms and conditions (algemene bankvoorwaarden) that apply to all its members. These terms include, among others, the following provision in article 2: "We must exercise due care when providing our services and we must thereby take your interests into account to the best of our ability. We do so in a manner that is in accordance with the nature of the services. This important rule always applies."

The NVB also issued the code of conduct for mortgage loans (Gedragscode Hypothecaire Financieringen). This code of conduct applies to mortgage backed financing in EU countries given to consumers that are or will be living in the relevant property. This code of conduct only applies to standard financings. Non-standard and/or tailor made financings fall outside the scope of this duty of care.

General terms of the lender

Apart from the general banking terms and conditions each Dutch bank also has its own set of general terms. Usually banks have different sets of general terms for their different product lines. These terms often include the same or similar duty of care provisions as the general banking terms and conditions issued by the NVB.

Other options under contract law

In addition to the duty of care of Dutch banks, there are of course other options under contract law that are available to contract parties. Such as, the moral obligation for parties renegotiate a contract on the basis of unforeseen circumstances (section 6:258 Dutch Civil Code) before they go to court. A contract party could also argue that Covid-19 could give rise to a force majeure (article 6:75 Dutch Civil Code). It goes beyond the scope of this article to discuss this any further however.

Conclusion

In the Netherland the public law regulatory framework has some impact on civil law matters as well. But this remains a bit of a grey area. And compliance with the rules of public law does not mean that a bank will always comply with its obligations under civil law.

Dutch banks are subject to a wide variety of written and unwritten rules when dealing with their clients (whether consumer or professional parties) and even have a responsibility to third parties as well.

When they do not comply with these norms, they can be sanctioned by the AFM on basis of public law and/or they can be sanctioned under civil law by their counterparties (and sometimes even third parties).

The impact that the Covid-19 emergency will have on companies and consumers is unprecedented. This will no doubt lead to additional case law on how far the special duty of care of Dutch banks can be stretched in these very special times and how this duty of care is influenced by the special measures Dutch banks are already taking.