Cour de Cassation, Commercial Chamber, 28 June 2005 (pourvoi no. 03-16.794) Bull.civ. 140, p. 150
28 June 2005
Translated by:
Tony Weir
Professor B. S. Markesinis

Fraudulent nondisclosure is not established merely by showing that the defendant was in breach of his precontractual duty of disclosure: it must be shown that the breach was deliberate and misled the complainant to a serious extent.

Given that, according to the judgment under attack (Paris, 2 May 2003), M. Cozon was offered the opportunity of buying, for 30 francs each, 20,000 options to purchase the same number of shares when the firm which employed him went public, as was to happen  in early 2000, and in order to finance the purchase of these options M. and Mme Cozon took out a loan with the Société générale (the bank),  that M. Cozon also entered with the bank a “Contract for options on listed shares”, whereby he agreed to exercise his options in January 2000 on the terms that if the market price of the shares at the time was lower than FF 118.42 (that being the sum of the cost of the option, the price per share and the charge for credit) the bank would make up the shortfall, and that if the market price was higher the bank would pay him the difference up to a limit of FF290.13 per share,  that when the firm went public the market price of the shares was over FF1,500, and that M. and Mme Cozon, alleging that they had been the victims of fraudulent nondisclosure, sought to have the contracts with the bank declared void…

Given that M. and Mme Cozon criticise the decision for dismissing their claim that the contracts with the bank were void by reason of fraudulent nondisclosure, whereas, as they assert,

1. a bank is bound, in all its contractual relations with its client, to inform the client of the risks inherent in speculative operations in the futures market, the information required depending on the experience of the client and the complexity of the operation; here, as  M. Cozon maintained, understanding the guarantee mechanism and its implications called for the possession of in-depth knowledge and specific skills which he did not have, being a total novice in the field of operations concerning derivatives, operations confined to companies and institutions, yet  the court simply asserted that M. Cozon was a graduate of the Ecole Nationale d’Administration and had served as an inspector of finances and so, without stating any fact indicating that he had actual and effective knowledge of derivatives or the mechanisms of covering the risks of market movements such as might have informed his consent, held  that the bank had no precontractual duty to inform M. Cozon about the options contract it had him sign, thereby depriving the decision of any legal basis under article 1109 Code civil;

2. the bank’s duty of disclosure was all the more precise as the operation involved derivatives in an over-the-counter transaction, and furthermore the paperwork provided by the bank regarding the loan and the cover agreement was misleading in suggesting that the investor would certainly receive a profit, whereas the risk of loss was only partially covered,  and was silent as regards the calculations underlying the risk of market movements, for want of which it was impossible to understand the bank’s proposal; here, in refusing to inquire, as requested, whether the information given by the bank in proposing the option contract had been full and accurate, especially as regards the calculations underlying the guarantee, the court of appeal failed to give its decision a legal basis under article 1109 Code civil;

3. in response to the criticism of M. and Mme Cozon that the bank failed to inform them of other possible types of cover against market movements of which the bank, as being expert in derivatives,  must have been aware, in particular those under which the investor would obtain a proportion of the eventual gain without any upper limit, the court, instead of asking whether the lender was not bound as part of its precontractual obligation of candour to tell the client of the existence of other ways of covering the risk of market fluctuations so that he could contract on the basis of full information, merely stated that as regards any possible rise in the market the bank could not be blamed for contracting as it did, since forecasting is one of the main functions of a bank’s trading department and it is not bound to discuss with its client the various parameters it uses in assessing the future of the market, and so failed to provide its decision with the legal basis required under article 1109 Code civil;

But given that fraudulent nondisclosure is not established merely by showing that the defendant was in breach of his precontractual duty of disclosure, since it must be shown that the breach was deliberate and caused a serious error in the complainant, the complaint here which does no more than assert that the bank failed, in breach of its precontractual duty, to give the client full information without alleging that the failure was deliberate and intended seriously to mislead M. Cozon into giving his consent, is unacceptable.

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