It is now common for Enterprises, especially large and medium-sized, to obtain from their Banks medium/long-term loans, but only subject to the of a “derivative financial product”, which is proposed by the lending Bank as useful to the beneficiary of the loan, for different reasons.
Among the most frequent “Derivative products” certainly it is possible to include the so-called “Interest Rate Swaps” (IRS), which are generally indicated by the lending Banks as suitable instruments for balancing the risk of increase of variable interest rates within the duration of mortgages.
However, often, on the basis of these products, the contracting Companies have unexpectedly been charged with large amounts, in addition to those directly deriving from the loan agreement, with a significant alteration of the original financial forecasts and of the anticipations made by the financing Bank (and approved by the customer) at the signing of the loan agreement.
It has been a long time, since when the Italian jurisprudence has started examining the main elements of a valid derivative financial product and of the banking practices releted to the correct signing of the agreements, but some recent rulings of the United Section of the Italian Supreme Court of Cassation and of the ordinary Italian Tribunals provide for a greater protection of Companies with reference to the charges deriving from such products.
At the outset, it shall be highlighted that, regarding the characteristics of this type of financial products, the client Company and the Bank are opposed in reciprocal and periodic payments that are additional and parallel to the repayment plan of the mortgage and depending on the increase or decrease of the reference rate (Euribor ) of the loan, assuming as a basis for calculating thid reciprocal debit-credit relationship both a certain reference amount (the so-called “notional”) on a certain period of time, which may or may not coincide with the duration of the loan.
A derivative could be define, in general, as a sort of bet, which has its own measurable value, and which can be considered legitimate, according to the Italian legislator, subject to certain conditions that make it socially useful and, therefore, only if the customer has the real possibility to measure in advance the risks, also on the basis of the information that the Bank shall provide, according to the applicable EU and national legislation, also regarding the most probable scenarios of the future evolution of the product.
First of all it should be clarified that the Banks that offer these products to customers shall respect the general rules of behavior of good faith and fair dealing, and the written form of the contracts with the sanction of nullity of the agreement, in accordance to the articles 21 and 23 of the Italian Consolidated Law on Financial Intermediation.
Furthermore, either at completion of the agreement or during the duration of the derivative agreement, the Bank shall communicate to the customer a series of information, including an economic benchmark called “mark to market” which is a method of measuring the fair value of the IRS, in any given period or duration of the same, based on the respective accounts, that can fluctuate over time, and which is equivalent to either the sum that one of the two parties of the contract must pay to the other, or claims to receive from the other, to terminate the contract earlier, or the price that a third party, unrelated to the contract, is willing to pay (and one of the contracting parties will receive) to take over the contract.
Below we highlight the most significant rulings of the Supreme Court on this matter:
- Regarding the Bank’s pre-contractual liability: the Supreme Court confirms that if the Bank breaches its duties to informing the customer and to correctly execute the contractual procedures imposed by Law, the Bank shall be then charged of pre-contractual responsibility, if said breaches occur prior to the signing of the preliminary contract providing for the general discipline of the subsequent financial relationships between the parties (so-called “framework contract”); on the other hand, the Bank may be charged of contractual liability if it breaches the rules governing the investment or the divestment procedures provided for the “framework contract” (United Section of the Italian Supreme Court of Cassation n.29017 December 18, 2020; United Section of the Italian Supreme Court of Cassation n. 26724 December 9, 2007).
- Regarding the void of the derivative contract: the agreement between the parties both on the measurability and on the specific object of the contract shall not be limited to the “mark to market” benchmark, but shall be also based future possible scenarios, since the first value is simply a number not really useful to understand the risk (United Section of the Italian Supreme Court of Cassation n. 8770 May 12,2020);
- Regarding the lack of merit of the derivative: the Interest Rate Swap agreement shall be declared null and void due to lack of cause pursuant to article 1418 paragraph 2 of the Italian Civil Code and, however, due to lack of merit pursuant to article 1322 of the Italian Civil Code, if it does not provide for either the value of the mark to market, or of the calculation formula or of the future market prices curves (Forward Curve), since such behavior could negatively affect the calculation of risks by the customer (Court of Bergamo, decision n. 786 June 18, 2020);
- Regarding the Code of conduct of the Banks: the Bank shall always act with the highest diligence, with professional fairness and with transparency, in accordance with the provisions of Article 21 of the Italian Consolidated Law on Financial Intermediation (T.U.F.), and shall provide the customer with all the necessary and adequate information on the suggested financial product, so that the customer be put in the position to make an informed choice, suitable for his needs, also through the preliminary information term sheet about the characteristics of the product and the indication of the risk provided for by the T.U.F. (Court of Milan n. 6224 October 14, 2020).
Landolfi & Associati banking&finance lawyers are available for any further insight and information on the jurisprudential and regulatory changes described above and on their possible application to specific banking and finance agreements.