Banking Law (International)

by Jan von Hein

1. Introduction

The European private international law of banking (on public international banking law, financial supervision) is primarily subject to the Union instruments concerning the private international law of contractual and non-contractual obligations (Rome I Regulation (Reg 593/2008), Rome II Regulation (Reg 864/2007), contractual obligations (PIL), non-contractual obligations (PIL)). However, the practical significance of private banking law as well as the particular problems which have to be taken into account regarding the interpretation of the decisive provisions justify a more detailed analysis. Concerning safe-custody business, the provisions of the Settlement Finality Directive (Dir 1998/26) and the Hague Convention on the Law applicable to certain rights in respect of securities held with an intermediary (PRIMA, not yet in force) have to be considered. In addition, there are overlaps between international banking law and international capital market law (capital markets law (international)), particularly in the field of the issuing business and the syndicated lending business as well as in the field of investment law.

2. The law applicable to banking contracts

a) Sources of law

Concerning contracts concluded since 17 December 2009 in the field of banking law, Rome I applies in most Member States, unless one of the exceptions mentioned in Art 1 applies (particularly Art 1(1)(d) Rome I relating to specific questions of securities law). However, in Denmark the Convention on the Law Applicable to Contractual Obligations (Rome Convention) remains in force. Ireland declared an opt-in to Rome I in 2008; the United Kingdom, Europe’s most important financial market, did the same in 2009. Although Rome I adheres to the basic approach of the Rome Convention, variations in detail exist; moreover, several new rules particularly in relation to financial services have been introduced.

b) Choice of law

Free choice of law by the parties (Art 3 Rome I) constitutes the cornerstone of the conflict of law rules for international banking contracts (see recital 11 Rome I). The choice of law has to take place explicitly or has to follow unequivocally from the provisions of the contract or the circumstances of the individual case (Art 3(1)2 Rome I). Banks regularly stipulate in their terms and conditions (standard contract terms) the application of the law of their own residence (see no 6(1) of the German Terms and Conditions for Banks).

The incorporation of the terms and conditions and the choice of law clause included therein has to be evaluated according to the chosen law, thus in the case of a use of the German Terms and Conditions for Banks, according to German law (Art 3(5), 10(1) Rome I). If the terms and conditions of a bank do not contain a choice of law clause—which is likely to occur only in exceptional cases—and there is no law the parties have implicitly agreed upon, the inclusion of terms and conditions is judged by the objective law applicable to the contract (Arts 4, 10(1) Rome I). The incorporation of terms and conditions can lead to problems in international banking because the requirement of an implicit agreement on terms and conditions differs in various states. According to the settled case law of the German Federal Supreme Court (BGH), there is no need for an explicit declaration of incorporation under §§ 305, 310(1) Bürgerliches Gesetzbuch (BGB) in order to include the Terms and Conditions for Banks. According to the BGH, even in international business foreign banks declare their consent implicitly by accepting the usual terms and conditions as a basis of their business relations. In this regard, it should not matter whether the law of the residence of the foreign bank contains a corresponding rule of law or custom (BGH 4 March 2004, IPRax 2005, 446, 447). The BGH applies these principles not only to banks with a geographic proximity to the German legal system (Alsace, Switzerland, the Netherlands), but to every foreign bank, provided that under the individual circumstances (extent of business relations, role of the bank in international business) it can be expected to be familiar with the customary practice of an incorporation of terms and conditions in contracts with German banks (BGH loc cit in relation to the Angolan National Bank). However, this bank-friendly line of reasoning may require a correction in the individual case in order to protect the party to the contract, towards whom an evaluation of the incorporation of terms and conditions pursuant to German law is not justified under the given circumstances, because, for instance, the party lacks the appropriate business experience and terms and conditions are not implicitly incorporated into a contract in his/her country’s legal system. This possibility is established by Art 10(2) Rome I, which permits a party to invoke the law of his/her habitual residence.

Concerning internally mandatory rules of the Member States’ laws, the choice of law is restricted in respect of purely domestic cases, as it already has been under the Rome Convention (Art 3(3) Rome I). As far as substantive European banking contract law has been harmonized by directives which have an internally mandatory effect, the appropriate rules cannot be waived by the choice of a third country’s law if all factual elements are located in the area of the Union, including Denmark (Art 3(4) Rome I; similar provisions contained in consumer-protecting directives remain in force as well, Art 23 Rome I).

Under Rome I, the parties are restricted to the choice of a state body of law. Even highly complex and practically exhaustive non-state bodies of law, like the Uniform Customs and Practice for Documentary Credits, can, where permitted by the applicable law, be incorporated into the contract by way of a substantive reference; they may not, however, be a substitute for the law of a country (see recital 13 Rome I).

c) Objective law applicable to contracts

Article 4(1) Rome I basically determines a typified connection in the interest of legal certainty. As a general rule, banking contracts concern the provision of (financial) services. Consequently, these contracts are like other service contracts subject to the law of the country where the service provider—the bank—has its habitual residence (Art 4(1)(b) Rome I). The term ‘service’ has to be interpreted in the context of Union law. As in terms of Art 57 TFEU, services are generally understood as being provided against remuneration. Furthermore, the interpretation of the term ‘service’ may refer to the jurisprudence of the ECJ concerning Art 5(1)(b) second indent of the Brussels I Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Reg 44/2001) (see also recital 17 Rome I). In Art 19(1)1 Rome I, the habitual residence of legal persons is legally defined as the place of their central administration; however, for contracts concluded in the course of the operation of a branch, the place where the branch is located is decisive (Art 19(2) Rome I). Consequently, concerning the deposit business, the residence of the bank or branch managing the account in question is essential (on the Rome Convention, see Sierra Leone Telecommunications Co Ltd v Barclays Bank plc [1998] 2 All ER 821, 827; Walsh v National Irish Bank Ltd [2008] 1 ILRM 56, 73 ff; OLG Frankfurt am Main 30 November 1994, IPRspr 1994 no 67).

The advisory activity and the asset management of banks also represent services which fall under Art 4(1)(b) Rome I. Likewise, the lending by a bank constitutes a service (see however BGH 13 December 2005, BGHZ 165, 248, 253 regarding Art 5 Rome Convention). The more narrowly drafted Art 13 of the European Convention on Jurisdiction and Enforcement (ECJE) (concerning the problem insofar Cour d’appel de Colmar 24 February 1999, (1999) ZIP 1209) has been replaced by Art 5(1)(b) second indent Brussels I; as a consequence, a wide notion of service classification has to be taken as a basis for characterization within the scope of international banking contract law.

Furthermore, guarantees granted by banks are to be characterized as services and consequently subject to the law of the place of residence of the bank or the branch in question. Regarding the law applicable to cross-border transfers, bank transfers (cross-border). Subject to special public law rules, the bank’s obligation of confidentiality (banking secrecy) results from the law applicable to bank contracts (eg see no 2 German Terms and Conditions for Banks). A special conflict of law rule for contracts within the scope of multilateral stock trading systems is created by Art 4(1)(h) Rome I. This rule, which does not only apply to stock exchanges in a common sense, but also to internal trading platforms of banks, subjects the contracts concluded within the framework of such a system to the law of that system, ie it is not essential which party is in the role of the purchaser or the seller in the particular case.

Concerning contracts which cannot be assigned to one of the specially regulated contract types of Art 4(1) Rome I or which show overlaps between these different types, Art 4(2) Rome I—as already known from the Rome Convention—establishes a connection to the habitual residence of the party required to effect the characteristic performance of the contract. Thus, for legal practice, in all the cases where the bank effects the characteristic performance, the question as to whether a ‘service’ according to Art 4(1)(b) Rome I exists or one of the other contract types of the first paragraph is involved, is purely academic. The rule has practical significance particularly for debt purchase, which does not fall under Art 4(1)(a) Rome I because this provision merely concerns contracts of sale of movables (concerning the law applicable to cessions, contractual obligations (PIL)). With respect to the guarantee by a consumer which often cannot be characterized as a service according to Art 4(1)(b) Rome I for lack of remuneration, the principle remains that the guarantor effects the characteristic performance, and thus the contract is governed by the law of his/her habitual residence.

Contrary to the original proposal of the Commission, Art 4(3) Rome I provides a general escape clause, under which a deviation from the above-mentioned conflicts rules is possible if it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country. In the interest of legal certainty this clause is to be used restrictively. Even with regard to accessory securities like, for example, the guarantee, the law applicable to the contract of collateral security regularly has to be considered separately and such a contract is not governed by the law applicable to the principal claim according to Art 4(3) Rome I. However, where, in the case of the purchase of a claim secured by a mortgage, the transmission of a right in rem is economically decisive from the parties’ point of view, assuming a closer connection of the sales contract to the country where the mortgaged land is located can be justified when additional indications are present (language of the contract, currency, conduct of negotiations etc) (BGH 26 July 2004, NJW 2005, 1041). Article 4(1)(c) Rome I only affects the legal act concerning the right in rem and has no limiting effect on the connection of the underlying contract of obligations (BGH loc cit).

Where the applicable law cannot be designated pursuant to Art 4(1) or (2) Rome I, because none of the contract types named in paragraph one is appropriate and the characteristic performance cannot be determined either, the contract is governed by the law of the country with which it is most closely connected (Art 4(4) Rome I). This escape clause has practical significance, eg for exchange contracts (swaps). In this respect, a splitting of the contract has to be rejected, particularly because Rome I has abandoned Art 4(1)(2) of the Rome Convention (dépeçage).

d) Consumer contracts

With reference to bank contracts with consumers, some peculiarities are to be respected (Art 6 Rome I). In the face of predominant criticism by scholars and practitioners, the Commission did not prevail with its original proposal to exclude party autonomy for consumer contracts. In particular, banks justifiably and vehemently fought against this proposal, which would have increased the costs of contract drafting for financial services significantly and would have led to a legal fragmentation of the internal market, especially with regard to online-banking (see particularly the summary of the ultimately successful arguments against the draft of the Commission from the bankers’ point of view by the leader of the Dresdner Bank’s EU liaison office: Woopen [2007] Europäische Zeitschrift für Wirtschaftsrecht 495). Party autonomy also remains available for consumer contracts, but its scope is restricted, as far as the provider has directed his activity at the consumer country, the contract falls within the scope of this activity and the provisions of the habitual residence of the consumer afford him/her a better protection (Art 6(2) Rome I). If no law is chosen, the law of the habitual residence of the bank customer is applicable under the above-mentioned circumstances (Art 6 (1) Rome I). If a targeting of the bank activities to the country of the customer is missing or the contract does not fall within the scope of that activity, the rules generally applicable to contracts govern the case (Arts 3, 4 in connection with Art 6(3) Rome I).

Compared to the Rome Convention, Art 6 Rome I considerably extends the material scope of the consumer-protecting conflict of law rules, especially with reference to financial services. While Art 5(1) Rome Convention, according to the prevailing opinion, only included loan contracts as far as they concerned the financing of a contract for the delivery of movables or the provision of services, Art 6 Rome I, which takes as a basis a wide notion of ‘service’, covers also mere loan contracts, real estate loan contracts, building loan agreements and the deposit business. With regard to international banking contracts with consumer participation, the exceptions in Art 6(4)(d) and (e) Rome I are of particular interest. Article 6(1) and (2) are not applicable to rights and obligations in connection with a financial instrument (markets for financial instruments) nor to rights and obligations constituting the conditions governing the issuance or offer to the public and public take-over bids of transferable securities, and the subscription and redemption of units in collective investment undertakings (UCITS) (Art 6(4)(d) Rome I). The aforementioned questions are subject to the conflict of law rules of the international capital market law because otherwise the trading of financial instruments would be severely hampered (recital 28 Rome I, capital markets law (international)).

However, Art 6(4)(d) Rome I makes a counter-exception for contracts concerning the provision of financial services. This is specified in recital 26. This recital states that ‘financial services such as investment services and activities and ancillary services provided by a professional to a consumer, as referred to in sections A and B of Annex I to Directive 2004/39/EC, and contracts for the sale of units in collective investment undertakings, whether or not covered by Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), should be subject to Article 6 of this Regulation’. The exclusion of Art 6 Rome I for the conditions governing the issuance or offer to the public and public take-over bids of transferable securities and the subscription and redemption of units in collective investment undertakings shall only affect such aspects binding the issuer or the offeror to the consumer, but not those aspects in relation to the provision of financial services (ibid). Consequently, financial services by banks and brokers, such as, for example, investment advice, portfolio management, securities custody, Lombard credit or the sale of fund units, remain subject to the consumer-protecting conflict of law rules of Art 6(1) and (2).

In relation to contracts within the framework of multilateral stock trading systems, Art 6(4)(e) Rome I makes clear that even in the event of consumer participation, the law of the system according to Art 4(1)(h) Rome I applies exclusively.

Article 6 Rome I, a special rule about conflict of law consumer protection, excludes the elevation of mere internally mandatory provisions, eg the former version of the Consumer Credit Directive, to international mandatory provisions in the sense of Art 9(1) Rome I (see BGH 13 December 2005, BGHZ 165, 248, 257, concerning Art 7(2) Rome Convention/Art 34 EGBGB).

3. Non-contractual obligations

With regard to non-contractual obligations in the area of private banking law (law of torts/delict, general and lex Aquilia, unjustified enrichment, management of another’s affairs without a mandate (negotiorum gestio), culpa in contrahendo), the Rome II Regulation applies (non-contractual obligations (PIL)). For culpa in contrahendo, Art 12 Rome II has to be respected. In respect of conflict of laws, contracts with protective effects in favour of third parties—which are particularly relevant in banking law and important for their ability to compensate for deficits in German tort law—should also be assigned to Rome II and not to Rome I, but should at the same time be connected accessorily to the law applicable to contracts (Art 4 Rome II).

4. Custody business

Recital 31 Rome I clarifies that the operation of a formal arrangement designated as a system under Art 2(a) Dir 98/26 of the European Parliament and of the Council of 19 May 1998 on Settlement Finality in Payment and Securities Settlement Systems (Settlement Finality Directive) should remain unaffected by Rome I. In Germany, the decisive conflict of law rule of the Settlement Finality Directive (Art 9(2)) has been transposed into § 17a DepotG. Accordingly, dispositions of instruments which have been entered into a register or posted to an account establishing a legal effect are governed by the law of the country which keeps the supervision of the register in which the legal effect establishing registration has been entered directly in favour of the disposition’s recipient, or where the depositary’s account administrating central office or branch which issues the legal effect establishing credit note is located. To achieve greater legal certainty in the area of collateral security, particularly taking into account the dematerialization of securities law, the Hague Conference has elaborated on the Hague Convention on the law applicable to certain rights in respect of securities held with an intermediary (PRIMA), which is not in force yet and which ultimately leaves, also in international property law, a greater leeway for party autonomy. It is doubtful whether conflict of law solutions can prove permanently satisfying in this complex area; therefore, UNIDROIT prepared a Convention on Substantive Rules for Intermediated Securities (Geneva Securities Convention) which was adopted in Geneva on 9 October 2009 by the diplomatic Conference but is not yet in force. Furthermore, the Commission is currently preparing a draft of a directive on legal certainty of securities holding and transactions (Securities Law Directive – SLD).

5. Issuing business and syndicated lending business, investment business

In these areas there is a frequent overlap between the contract law tailored to the relationship between a bank and its customer and the market-regulating capital markets law (capital markets law (international)). Because of the complexity of this matter, the reader is referred to the below-mentioned literature.

7. Outlook

International banking contract law has been placed upon a solid foundation by Rome I; the same is true for the aspects of non-contractual obligations relevant to banks governed by Rome II. Both regulations follow an approach which preserves the important balance between legal certainty, flexibility in the individual case and the greatest possible scope for party autonomy. The development concerning securities custody as well as the development in the areas which overlap with the highly dynamic international law of capital markets is less settled and shows a larger influence of non-EU institutions (Hague Conference, UNIDROIT).

Literature

Dorothee Einsele, ‘Die internationalprivatrechtlichen Regelungen der Finalitätsrichtlinie und ihre Umsetzung in der Europäischen Union’ (2001) WM 2415; Christoph Graf von Bernstorff, Rechtsprobleme im Auslandsgeschäft (5th edn, 2006); James Steven Rogers, ‘Conflict of Laws for Transactions in Securities Held Through Intermediaries’ (2006) 39 Cornell International Law Journal 285; Dorothee Einsele, ‘Auswirkungen der Rom I-Verordnung auf Finanzdienstleistungen’ (2009) WM 289; Robert Freitag, ‘Einzelne Auslandsgeschäfte’ in Peter Derleder, Kai-Oliver Knops and Heinz Georg Bamberger (eds), Handbuch zum deutschen und europäischen Bankrecht (2nd edn, 2009) § 62; Peter Mankowski, ‘Finanzverträge und das neue Internationale Verbrauchervertragsrecht des Art. 6 Rom I-VO’ (2009) RIW 98; Thomas Schobel, ‘Telos Versus Unilateralism: Cross-border Banking Business and the International Applicability of Domestic Banking Law’ (2009) 63 Consumer Finance Law Qarterly Report 177; Thorsten Voß, Die Securities Law Directive und das deutsche Depotrecht [2009] Europäisches Wirtschafts- & Steuerrecht 209; Dorothee Einsele, Bank- und Kapitalmarktrecht (2nd edn, 2010); Reinhard Welter, ‘Bankgeschäfte mit Auslandsbezug’ in Herbert Schimansky, Hermann-Josef Bunte and Hans-Jürgen Lwowski (eds), Bankrechts-Handbuch, vol 1 (4th edn, 2011) § 26.