Start of the limitation period to bring an action for annulment in complex bank contracts

From a superficial and layman’s reading of article 1,301 of the Spanish Civil Code coupled with the ambiguous terminology used therein, it can be inferred that this article regulates the calculation of the deadline for the execution of an action for absolute nullity. However, according to the consistent case law of the Supreme Court, as for example, in judgment no. 769/2014, issued on 12 January 2015, (hereinafter, “Judgment no. 769/2014“), the cited provision makes reference to dies a quo (the start date of the calculation of the deadline) from which the four year limitation period to exercise the action for relative nullity or revocability starts to run.

In order to interpret the mentioned article, a distinction must be made between absolute nullity and relative nullity. Thus it will be a case of absolute nullity when either the contract lacks any of the essential elements or when it is contrary to the law. Meanwhile, relative nullity refers to those cases in which the contract has been agreed under misapprehension, violence, intimidation, deceit or misrepresentation of the law.

Before discussing this issue in depth, it is necessary that we place particular emphasis on the two fundamental elements that ought to occur in order that the action of either absolute nullity or revocability may be successful. Firstly, it is convenient that some of the reasons highlighted in the paragraph above have occurred. Secondly, it is essential that the limitation period of 4 years has not expired (meaning that it is not subject to interruption, because once the limitation period has expired the action will not be able to be exercised) since the consummation of the contract. The consummation occurs when “the obligations of both parties are completely fulfilled” according to the interpretation conferred by the Civil Chamber of the Spanish High Court in their judgements dated 24th June 1897, 20th February 1928 and 11th July 1984.

Recently we have confirmed that, due to the large number of complex financial products that are being contracted, it is increasingly more common and necessary to submit the case, as a last resort, to judicial or arbitral instances to determine the dies a quo and the possible invalidation of consent from one of the parties. While it is true that in Spanish Law the maxim fides bona contraria est fraudis et dolo (sic) is widely accepted, it is no less certain that, in this type of bilateral contracts, one of the parties does not have the means nor the specific knowledge to understand the degree and the extent of the potential financial risks that come along with the contracting of this type of products.

It is precisely due to the high level of complexity of these financial products, that Spanish courts understand that the dies a quo does not start to run until the client has a real understanding of the error he has suffered, which coincides exactly with the moment in which certain events occur that enable him to understand the characteristics and the extent of the risks of the financial product he has contracted. So, in the case of a swap contract, Judgment no. 769/2014, understood that, amongst other things, “the suspension of the liquidation of benefits or the accrual of interest, the implementation of hybrid management measures agreed by the FROB, or in general, another similar event that allows the true understanding of the characteristics and risks of the entire acquired product” is the point at which the real knowledge of the facts is gained.

The controversies derived from these types of cases have not been incidental in Spain; in fact they have been reproduced on many occasions in the rest of the countries within the EU. As a result of this, on 1st November 2007, the Regulation 1289/2008/EC of the Commission came into force. This Regulation, along with the Directives 2004/39/EC and 2006/73/EC of the European Parliament and of the Council, are known as the MiFID. It is of great relevance that the MiFID is analysed in its entirety as it intends to protect the rights of the investors and to impose certain obligations on the banking entities. These obligations include the duty of rightly informing the client of all of the characteristics, risks and the full scope of the financial consequences of contracting this type of products.

Finally we conclude that in the cases of relative nullity, when complex financial products are contracted, the time limit for bringing said action is four years and this time limit begins to run from the moment that the contract is consummated. In other words, the very moment in which the client is aware of the financial consequences that are derived from the product he has contracted. To avoid, in the greatest way possible, that these contractual relationships lead to disputes, certain obligations have been imposed ex lege on the banking entities that they must follow at all events.