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21 October 2014
Does a bank have the right to withhold a client's assets if that client's account has been previously credited with Madoff redemptions and in the meantime the bank has been the target of a clawback action abroad? This question raised the controversial issue regarding the Swiss law on mandate agreements and agency, which was recently decided for the first time by the Zurich Commercial Court on the merits.
According to Article 402(1) of the Code of Obligations, the principal is obliged to reimburse the agent for expenses incurred in the proper performance of the mandate agreement and release it from obligations entered into in its performance.
Whether Article 402(1) covers foreign clawback actions has not been made clear in Swiss doctrine and jurisprudence.
The Zurich Commercial Court has decided, in accordance with dicta in a prior Supreme Court decision in summary proceedings, that the term 'obligation' within the scope of Article 402(1) includes not only specific contractual obligations, but also obligations on other legal bases, provided that they result from a legal transaction which the agent has concluded in its own name, but in the interest and for the account of the principal.(1)
The claimant was a client of the defendant bank. The contractual relationship between the parties was based on, among other things, an account agreement and a pledge agreement.
In 2000 the claimant acquired a number of units of the Fairfield Sentry Fund at a cost of approximately $500,000, with a value date of October 15 2008 (only a few weeks before the exposure of Madoff's intrigues). The claimant instructed the bank to redeem the units and was credited with redemption proceeds of approximately $1 million.
After the fund's bankruptcy in December 2008, the liquidators filed a claim in the United States against the bank for repayment of the redemption. To cover itself, the bank exercised its contractual pledge on the claimant's assets.
In February 2011 the claimant filed a claim with the Zurich Commercial Court for summary protection in clear cases (Article 257 et seq of the Code of Civil Procedure), requesting payment out of the blocked funds. The court granted the claim on July 7 2011. The bank appealed and the Supreme Court set aside the Commercial Court's sentence on February 22 2012.(2)
On April 17 2012 the claimant filed a new claim with the Zurich Commercial Court for payment out of the blocked funds.
The claimant alleged that the bank had no right of pledge on its account, as the clawback claims raised against the bank in the US proceeding were not entered into in performance of the mandate agreement and thus did not fall under Article 402(1).
The court found that the bank's services included the acquisition and sale of fund units, but also covered:
The different services were a package of services which, in the absence of more specific regulation in the Code of Obligations, fall under the rules on mandate agreements (Article 394(2)). Further, applying the rules on commission agreements which the claimant advocated, an equivalent right would have been available to the bank under Article 431(1) and Article 425(2) of the code.
The claimant further alleged that the bank had at first acquired the units on its own account and then resold them to the claimant. For this reason, the case did not constitute an indirect representation. The bank rather would have acted on its own account within the scope of Article 436. Consequently, the acquisition should have been treated under commission law, whereby agency law did not apply.
According to the Zurich Commercial Court, it was irrelevant whether the fund units were originally acquired by the bank. The bank's right of pledge in any event related only to obligations resulting from the redemption and the bank's role in the redemption qualified as that of an agent, subject to a mandate agreement. Accordingly, Article 402(1) is applied.
The claimant argued that the bank should have no rights under Article 402(1). In accordance with its wording and position in the Code of Obligations, Article 402(1) covers only commitments, which the agent voluntarily enters into for the purpose of performing the mandate agreement. In this case, the clawback directed against the bank for reasons of unjust enrichment was not voluntarily entered into; nor was its purpose for the performance of the mandate.
The Commercial Court held that the right to reimbursement under Article 402(1) also protects the agent from future loss resulting from obligations entered into in the interest of the principal.
An 'obligation' exists if the agent, in the interest of the principal, enters into a commitment to a third party and thereby increases its liabilities. However, the term covers not only specifically contracted obligations, such as the obligation to pay the purchase price. It also includes commitments on other legal bases, as long as they stem from a legal transaction which the agent has entered into in the interest of the principal, and as long as these commitments would have been the principal's had the agent acted as a direct representative of the principal. Accordingly, all obligations are included which result from or are directly related to a legal transaction entered into by the agent.
Since the bank faced the fund's clawback claim for repayment only because it properly redeemed the fund units according to the instructions of the claimant, the claim was connected to the agency relationship.
The claim that the bank faced in the US proceeding (clearly arising from the wording of the second amended claim on July 19 2012) was based on unjust enrichment, which allows claims for repayment to be qualified as voluntary, since the bank voluntarily redeemed units on the claimant's instructions.
Accordingly, the clawback claim for approximately $1 million raised against the bank was an obligation within the meaning of Article 402(1) from which the bank had a right to be released by the claimant.
The claimant further suggested that, within the pending US proceeding, there is no obligation unless and until a judgment has been rendered.
The Zurich Commercial Court held that an agent may be released as soon as its liability to the third party arises. This applies independently of whether the liability is already due, contested or subject to an ongoing proceeding. Article 402(1) must be interpreted in a way that takes into account the natural uncertainty of such liabilities. Even the existence of a contested liability burdens the agent with an obligation under Article 402(1).
In this case, a final decision about the legal existence of the liability will be rendered in the US proceeding only. However, the bank now has a right against the claimant to be released from this obligation, either externally by having the claimant assume the obligation and defend it in lieu of the bank or internally through providing sufficient cover. This right under Article 402(1) is covered by the pledge agreement and the bank's commercial rights of retention.
Unless there is sufficient cover in the accounts, the bank is not obliged to make transfers.
For more information please contact Martin Burkhardt at Lenz & Staehelin by telephone (+41 44 204 1212), fax (+41 44 204 1200) or email (firstname.lastname@example.org). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.
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