Loans: the bank’s duty to warn the borrower, liability action in the event of breach and statute of limitations
Pre-contractual duty to inform for a Loan Agreement
Before taking out a consumer loan, a certain amount of information must be provided in order to study the offer and understand the extent of the borrower’s commitment.
In a large number of cases, lenders have produced clauses in the loan offer signed by the borrower, under which the latter acknowledges having received the pre-contractual information sheet required by law and the expected duty of explanation.
The question of the validity and scope of these clauses inevitably arose. Notable decisions by the European Commission (“Commission européenne”) with unfair contract terms were quick to express their hostility to such clauses. The French High Court (“Cour de cassation”) eventually followed suit.
The duty to warn means knowing what diligent behavior is expected of a banker who complies with his obligation, and what the penalty is for failing to do so. In other words, the questions addressed are those of the content of the duty to warn, and of the damage that can be made good in the event of a breach.
The starting point is a decision regarded as seminal by the French Supreme Court (“Cour de cassation”), dated July 12, 2005 (no. 03-10.921), which emphasized that:
“The banker disregards his obligations towards the borrower by granting him a loan that is excessive in relation to his ability to pay, thus failing in his duty to warn”.
By stating that it is wrong to grant a loan that is excessive in relation to the borrower’s ability to pay, the ruling implied that the banker’s diligent behavior must be to refuse to grant excessive credit.
The doctrine immediately recognized that there was a difficulty here, arising from the banker’s duty not to interfere. And some authors have argued that the warning should rather be understood as an obligation to alert the customer to the level of indebtedness resulting from the loan.
In the same context, there is a duty to inform the customer. This duty has been clearly distinguished from the duty to warn.
It is an intermediary duty in the scale of obligations incumbent on credit institutions, the two extremes of which are the obligation to inform on the one hand, and the obligation to advise on the other.
For the credit institution, the duty to inform is more restrictive than the duty to warn. The duty to inform implies a duty on the part of the credit institution to present the advantages and disadvantages of a transaction to the customer. It is not sufficient to simply point out the risks. However, the duty to warn includes the duty to alert, which is quite similar to the duty to enlighten.
The duty to enlighten is less demanding than the duty to advise, insofar as the credit institution does not have to choose for its customer. It does not have to guide the customer’s decision.
The duty to enlighten, conceived in this way, nevertheless implies a duty on the part of the credit institution to interfere in its customer’s affairs. The credit institution is obliged to carry out investigations, if only to seek out all the information needed to assess the proposed transaction.
Breach of the pre-contractual disclosure obligation for a Loan Agreement
In the event of a breach of the general obligation to provide information, article 1112-1, paragraph 6 of the French Civil Code (“Code civil”) stipulates that:
“In addition to the liability of the party who was bound by it, failure to comply with this duty to inform may result in the annulment of the contract under the conditions set out in articles 1130 and following.”.
Two categories of sanctions are envisaged by this provision:
Implementing the liability of the debtor of the information obligation
A ruling by the French Supreme Court (“Cour de cassation”) on June 7, 2023, on the grounds of breach of the pre-contractual obligation to provide information, states that:
“The borrower’s signature on the preliminary offer of credit containing a clause to the effect that he acknowledges that the lender, who must provide proof that he has fulfilled his obligations, has given him the standardized European pre-contractual information sheet, constitutes only an indication that it is up to the lender to corroborate with one or more additional elements”.
With this ruling, banks are now reminded of the importance of the pre-contractual obligation to provide information, and the need to be able to establish that the information was actually given.
Statute of limitations and contractual information
(« Prescription et information contractuelle »)
Much has been written on the question of the limitation period for pre-contractual disclosure obligations.
The article 2224 of the French Civil Code (“Code civil”) lays down an a priori simple principle: that of a five-year limitation period. However, the situation quickly becomes complicated when it comes to liability claims for breach of a pre-contractual information obligation.
It should also be noted that even before Law 2008-561 of June 17, 2008 reforming the statute of limitations in civil matters came into force, the Supreme Court (“Cour de cassation”) held that the statute of limitations for a liability action runs from the date on which the damage occurred, or from the date on which it is revealed to the victim if the latter establishes that he or she had no prior knowledge of it.
In addition, the article L110-4 of the French Commercial Code (“Code de commerce”) states that personal actions are time-barred after five years from the date on which the holder of a right knew or should have known the facts enabling it to be exercised.
Thus, in principle, it will be necessary to demonstrate, in addition to the existence of the lack of information, a prejudice and a causal link between the lack of information and the prejudice.
Since the 2008 reform of the statute of limitations, the five-year period is identical for both contractual and tort claims.
As for the starting point, on the question of breach of the obligation to provide information, according to the Court of Appeal (“Cour d’appel”) it is the date on which the damage occurred, i.e., the due date of the loan.
There is nothing to suggest that the situation would have been any different if liability had arisen in tort rather than in contract.
The attainment of the loss of opportunity
(« Réalisation de la perte de chance »)
The notion of loss of opportunity is rather complex, as it is ambiguous. It can refer to both the disappearance of the probability of obtaining an advantage and the disappearance of the possibility of avoiding a loss.
Strictly speaking, loss of chance can be understood as the disappearance of the probability of obtaining an advantage, but the risk that could designate the existence of a probability of suffering a loss.
Compensation for the loss of an opportunity requires certain conditions that are not as clear-cut in the case of compensation for risk, which may correspond more to a future loss whose occurrence is to be prevented.
The Supreme Court (“Court of Cassation”) recitals have a powerful influence, since they imply that any breach of the duty to inform or fraud automatically creates a loss, which must be compensated.
In this case, the loss resulting from a breach of an obligation to provide information is analyzed as a loss of opportunity not to contract or not to have been able to contract on more advantageous terms.
Indeed, the Court of Appeal of AMIENS (“Cour d’appel”) in a judgment dated January 31, 2019 (n°14/03848) states that:
“The loss resulting from the loss of opportunity not to contract should be assessed at the sum of 20,000 EUR”.
The same jurisdiction, in NIMES by a judgment dated December 14, 2017 (n°16/01608) concerning a fraudulent concealment, in the context, of a sale considers that the loss:
“Of the possibility of contracting on more advantageous terms (…) must be assessed at 10,000 EUR”.