Scope of the Bank's Duty to Inform on the Terms of Implementation of a Guarantee

Sommaire

A clause inserted in the loan agreement that is brief and not explicit regarding the terms of implementation of the guarantee is not sufficient.

Cass. com., 12 June 2024, No. 23-11.630, Published in the bulletin.

The Bank’s Duty to Inform

Relying on general contractual liability under Article 1231-1 of the French Civil Code, the Court of Cassation holds that the bank granting credit is bound by an obligation to inform the borrower about the terms of implementation of a guarantee taken out for the bank’s benefit.

In a decision rendered this summer, it provides interesting clarification on the scope of this duty to inform and on what does not constitute sufficient information.

The Facts

In this case, a bank had granted a loan of 400,000 euros to a company, the transaction being secured with a risk-sharing arrangement with BPI France covering 50% (these are the so-called “BPI France guarantees”).

Following unpaid installments, the bank declared the loan immediately due and payable. Sued for payment, the company invoked a breach by the bank of its duty to inform regarding the guarantee.

In this particular case, the issue concerned the protocol for implementing the guarantee.

Indeed, BPI France guarantees are distinctive: they first exhaust all remedies against the debtor and its sureties, then the guarantor covers the unpaid amounts in proportion to the risk. BPI France describes this on its website as follows:

” Bpifrance does not intervene to insure the entrepreneur against the risk of business failure, but guarantees its banks for part of their potential final loss on specifically identified credit operations. This is not an additional guarantee but a sharing of the final loss with the bank. The bank always retains its own share of risk in the credit. The guarantee benefits only the financial institution. It can under no circumstances be invoked by third parties, in particular by the borrower and their personal guarantors, to contest all or part of their debt. The bank retains the usual security interests and, if the credit operation goes badly due to the failure of the business, it notifies Bpifrance, realizes the security interests, and calls upon Bpifrance for the balance, for the portion guaranteed by Bpifrance “.

However, the company believed that BPI France would have paid the funds pro rata to the risk before being sued for payment.

The Court of Appeal’s Reasoning

The Limoges Court of Appeal dismissed the company’s claim for damages based on the bank’s breach of its duty to inform, holding that the guarantee clause stipulated in the loan agreement was perfectly clear in that it benefited the lender, that a guarantee is by definition merely subsidiary, and that providing a notice is not necessary.

The Court of Appeal had relied on the following loan agreement provision: “Guarantees: as security for and repayment of this loan in principal and interest, costs and other ancillary amounts, and for the performance of all obligations under this agreement, the borrower provides the lender with the guarantee designated below: Bpifrance for a share of 50%“.

The Court of Cassation’s Decision

For the Court of Cassation, this information, which did not explain the mechanism of the guarantee and could therefore lead the borrower to believe that Bpifrance would pay the sums before any legal action was taken against it, was not sufficient.

Contrary to what the Limoges Court of Appeal had held, the Court of Cassation does not appear to consider, from the perspective of the duty to inform, that a guarantee “is by definition merely subsidiary and that providing a notice is not necessary“.

It is therefore essential to provide more explicit information. This underscores the importance of precise documentation, particularly given the growing number of this type of guarantee.

This decision highlights how crucial it is for banking institutions to prove that they have properly fulfilled their duty to inform, particularly through the retention of peri-contractual documents evidencing this compliance. This will likely become a major issue before the court of appeal on remand.

Thus, this ruling provides particularly relevant clarification on the scope of the duty to inform. Approaching this issue from the standpoint of how a guarantee operates calls for increased caution by banks’ legal departments and represents an argument to be considered by companies facing unpaid debts.

The documentation provided to clients must be adapted to follow this clearly established case law development.

Read online:

Full Text of the Decision

Court of Cassation, Civil Division, Commercial Chamber, 12 June 2024, 23-11.630, Published in the bulletin

Court of Cassation – Commercial Chamber

Appeal No.: 23-11.630

ECLI:FR:CCASS:2024:CO00354

Published in the bulletin

Ruling: Quashed and set aside

Public hearing of Wednesday, 12 June 2024

Decision under appeal: Limoges Court of Appeal, 14 December 2022

Presiding Justice

Mr. Vigneau

Counsel

SARL Le Prado – Gilbert, SCP Capron

Full text

FRENCH REPUBLIC

IN THE NAME OF THE FRENCH PEOPLE

THE COURT OF CASSATION, COMMERCIAL CHAMBER, has rendered the following judgment:

COMM.

COURT OF CASSATION

______________________

Public hearing of 12 June 2024

Quashed and set aside

Mr. VIGNEAU, Presiding Justice

Judgment No. 354 F-B

Appeal No. S 23-11.630

F R E N C H R E P U B L I C

_________________________

IN THE NAME OF THE FRENCH PEOPLE

_________________________

JUDGMENT OF THE COURT OF CASSATION, COMMERCIAL, FINANCIAL AND ECONOMIC CHAMBER, OF 12 JUNE 2024

1/ Gris Ceram, a limited liability company, with registered office at [Address 3],

2/ BTSG, a professional civil partnership, with registered office at [Address 1], represented by Mr. [X] [G], acting in his capacity as court-appointed liquidator of Gris Ceram,

filed appeal No. S 23-11.630 against the judgment rendered on 14 December 2022 by the Limoges Court of Appeal (Economic and Social Chamber), in the dispute between them and the Caisse regionale de credit agricole mutuel du Centre Ouest, with registered office at [Address 2], respondent in cassation.

The appellants rely, in support of their appeal, on one ground of cassation.

The case file was communicated to the Procureur General.

On the report of Mrs. Champ, Reporting Judge, the observations of SARL Le Prado – Gilbert, counsel for Gris Ceram and BTSG, in its capacity as liquidator, of SCP Yves and Blaise Capron, counsel for the Caisse regionale de credit agricole mutuel du Centre Ouest, after deliberation at the public hearing of 30 April 2024 at which were present Mr. Vigneau, Presiding Justice, Mrs. Champ, Reporting Judge, Mrs. Vaissette, Senior Judge, and Mrs. Aubac, Clerk of the Chamber,

the Commercial, Financial and Economic Chamber of the Court of Cassation, composed of the aforementioned Presiding Justice and Judges, having deliberated in accordance with the law, has rendered the present judgment;

Resumption of proceedings

1. Formal notice is taken of SCP BTSG’s resumption of proceedings, in its capacity as liquidator of Gris Ceram, placed in judicial liquidation by a judgment of the Limoges Commercial Court of 10 January 2024.

Facts and procedure

2. According to the judgment under appeal (Limoges, 14 December 2022), the Caisse regionale de credit agricole mutuel du Centre Ouest (the bank) granted Gris Ceram (the company) a loan of 400,000 euros, secured by a risk-sharing arrangement with Bpifrance covering 50%.

3. Following unpaid installments, the bank declared the loan immediately due and payable, then sued the company for payment, which invoked a breach by the bank of its duty to inform regarding the guarantee.

Examination of the ground

On the ground, taken in its first branch

Statement of the ground

4. The company complains that the judgment ordered it to pay the bank a certain sum under the loan and dismissed its claims, arguing that “the banking institution granting credit is bound by a duty to inform the borrower and it is incumbent upon it to specify that the Bpifrance guarantee benefits only the intervening institution, that it cannot be invoked by the beneficiary and its guarantors, and that it only intervenes when all remedies have been exhausted; that to dismiss Gris Ceram’s counterclaim based on the Caisse’s breach of its duty to inform it about the conditions of the Bpifrance guarantee, the court of appeal had cited the terms of the following provision: ‘Guarantees: as security for and repayment of this loan in principal and interest, costs and other ancillary amounts, and for the performance of all obligations under this agreement, the Borrower provides the Lender with the guarantee(s) designated below: BPI France […] for a share of 50.00%’, and deduced that ‘this guarantee clearly benefits the lender and not itself since it states: “the Borrower provides the Lender with the guarantee(s)”. This clause is therefore not open to interpretation’; that in ruling on these grounds, which are insufficient to establish that the Caisse had informed its client of the Bpifrance guarantee mechanism whereby the creditor bank whose loan has not been fully repaid pursues the borrower and its sureties for payment and, at the end of these proceedings, receives from Bpifrance the unrecovered sums, in proportion to the latter’s share of risk, the court of appeal deprived its decision of a legal basis under Article 1147, now Article 1231-1 of the Civil Code.”

Response of the Court

Having regard to Article 1231-1 of the Civil Code:

5. It follows from this provision that the bank granting credit is bound by an obligation to inform the borrower about the terms of implementation of a guarantee taken out for the bank’s benefit.

6. To dismiss the company’s claim for damages against the bank for breach of its duty to inform, the judgment held that the guarantee clause inserted in the loan agreement was perfectly clear in that it benefited the lender, that a guarantee is by definition merely subsidiary, and that providing a notice is not necessary.

7. In so ruling, on grounds insufficient to establish that the bank had informed the company of the terms of the Bpifrance guarantee and, in particular, of its subsidiary nature, the court of appeal did not provide a legal basis for its decision.

ON THESE GROUNDS, and without it being necessary to rule on the other complaints, the Court:

QUASHES AND SETS ASIDE, in all its provisions, the judgment rendered on 14 December 2022, between the parties, by the Limoges Court of Appeal;

Remits the case and the parties to the state they were in before said judgment and refers them to the Bourges Court of Appeal;

Orders the Caisse regionale de credit agricole mutuel du Centre Ouest to bear the costs;

Pursuant to Article 700 of the Code of Civil Procedure, dismisses the application made by the Caisse regionale de credit agricole mutuel du Centre Ouest and orders it to pay Gris Ceram, represented by its liquidator, BTSG, the sum of 3,000 euros;

Orders that, upon the diligence of the Procureur General at the Court of Cassation, this judgment shall be transmitted to be noted in the margin of or appended to the quashed judgment;

So decided and adjudged by the Court of Cassation, Commercial, Financial and Economic Chamber, and delivered by the Presiding Justice at the public hearing of the twelfth of June two thousand and twenty-four. ECLI:FR:CCASS:2024:CO00354

Analysis

Headnotes and summaries

Cassation civil – BANKING – Fault – Breach of duty to inform the client – Various applications – Obligation to inform the borrower about the terms of implementation of a guarantee

It follows from Article 1231-1 of the Civil Code that the bank granting credit is bound by an obligation to inform the borrower about the terms of implementation of a guarantee taken out for the bank’s benefit

Applicable provisions

Article 1231-1 of the Civil Code.