Under Article 400(1) of the Code of Obligations, an agent is obliged at the principal's request (which may be made at any time) to give an account of his or her agency activities and to return anything received, for whatever reason, as a result of such activities. In a number of recent judgments, the Federal Supreme Court held that this restitution duty applies to retrocessions(1) received by financial intermediaries acting as investment advisers or managers.
Until recently, two questions concerning this restitution duty were unresolved:
- at which point the statute of limitation starts to run; and
- what its duration should be.
Both questions were subject to controversy in scholarly discussion and lower-court practice. Regarding the duration of the statute of limitation, some found that the applicable statute of limitation was five years (Article 128(1) of the Code of Obligations), while others found it was 10 years (Article 127 of the code). Regarding the start date, some held that it began at the end of the mandate relationship, while others found it began with the receipt by the agent of each payment.
On June 16 2017 the Federal Supreme Court ruled (4A_508/2016) on both points. It found that the statute of limitation applicable to the claim for restitution is 10 years and that it starts to run on the receipt of each payment by the agent. The issue of statutory interest remained undecided, but now appears much less controversial.
In 1994 an international transport organisation (the principal) entered into an agency contract with an insurance consultancy (the agent). The subject of the contract was the agent developing a new insurance concept for the principal. Based on this insurance concept, the principal concluded several insurance contracts with a number of insurers. In 2005 the principal learned that the agent (as from 1999 its legal successor) had received from various insurers as retrocessions a percentage of the insurance premiums paid by the principal from 1995 to 2005. The principal immediately terminated the agency contract.
In 2007 the principal filed claims with the Geneva District Court requesting the restitution of the retrocessions which the agent had received from the various insurers. The court held that the agent was obliged to reimburse the principal for seven retrocessions that had been received between 1995 to 2005, plus default interest.
The agent appealed, requesting that the claims of three of the retrocessions be dismissed. The agent argued that the claim for restitution of the retrocessions was subject to a five-year limitation period (Article 128(1)) which had started to run on the day that the agent had received the retrocession. As the principal had tolled the limitation period in May 2006, all retrocessions received by the agent earlier than June 2001 were time barred.
The Geneva Court of Appeals dismissed the agent's objection. It held that the claim for restitution of the retrocessions was subject to a 10-year limitation period (Article 127) and that it started to run only on the day of the termination of the agency contract. The agent appealed before the Federal Supreme Court.
Apart from certain relief sought on the basis of having already paid the undisputed part of the judgment (ie, the retrocessions received within five years of the first tolling of the statute of limitation), the agent requested the annulment of the Geneva Court of Appeals' judgment and that the matter be remanded for a new decision.
The Federal Supreme Court first recalled its prior decisions regarding retrocessions and the restitution duty of the agent. It held that the restitution duty is a central element of the altruistic nature of an agency contract. The agent must return to the principal all assets that are intrinsically linked to the execution of the agency contract and can keep only the assets received at the occasion of performing the contract if there is no link to the contract. In this case, the agent did not dispute the restitution duty per se.
The court held that the claim for restitution of the retrocessions was subject to a 10-year limitation period (Article 127). In order for the five-year limitation period (Article 128(1)) to be applicable, the claim for restitution would have to constitute a periodic payment, which was not the case. The court held that the periodic nature of the retrocessions had no bearing on the agent's duty of restitution, as it was based on the fact that the agent had from time to time gained advantages from third parties as a result of his activities.
As to the event triggering the limitation period, the court held that for every retrocession received by the agent, this was the day on which he had received the respective payment. Under Article 130(1) of the code, the limitation period starts to run once the debt is due. Where no time of performance is stated in the contract or evident from the nature of the legal relationship, the debt is due immediately (Article 75 of the code). As the duty of the agent to restitute the respective retrocession arises on receipt of each payment, the limitation period also begins at this point. The court further held that the restitution duty was due irrespective of whether the agent had been (or could have been) aware of it. The Federal Supreme Court found the view of the Geneva Court of Appeals to be unjustified, as it would have the consequence that the principal could ask for restitution of the retrocessions only once the agency contract had been terminated.
The Federal Supreme Court partially admitted the appeal. It partially annulled the contested judgment and remanded the matter to the Geneva Court of Appeals for a new decision. The Geneva courts will now have to calculate the amount of retrocessions to be paid to the principal by:
- applying a 10-year limitation period starting on receipt of each payment; and
- taking into account the payments effected by the agent after the Geneva District Court decision.
Agent's duty to pay statutory interest
Under Article 400(2) of the Code of Obligations, the agent is obliged to pay interest on any sums which he or she may be late in passing on to the principal. While in this case, the Federal Supreme Court did not explicitly state at what time the duty to pay default interests began, it clearly held that the restitution duty arose with receipt by the agent of each payment.
According to legal doctrine, the duty to pay interest starts when the duty to restitute falls due (Article 75 of the code).
As the restitution duty arises and (absent an agreement to the contrary) also falls due on receipt of each payment, the statutory interest also arises on the receipt by the agent of each retrocession.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For more information please contact Martin Burkhardt or Anamarija Primorac at Lenz & Staehelin by telephone (+41 44 204 1212) or email ([email protected] or [email protected]). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.
Endnotes
(1) Retrocession fees are the kickbacks, trailer or finder's fees that are paid to advisers or distributors by asset managers. Such payments are made from client money, but are often not disclosed to clients.
