Credit / The Banker’s Duty of Proportionality: Toward a New Body of Case Law?

A ruling by the First Civil Chamber of the Court of Cassation on January 11, 2017 (Case No. 15-21262) could be a game-changer.

The duties and obligations of banks that extend credit have long been the subject of extensive case law.

On January 11, the First Civil Chamber of the Court of Cassation ruled on a motion to void a loan agreement based on the bank’s breach of its duty of “proportionality,” and its decision was somewhat surprising.

In this case, a bank had granted Ms. X a loan to finance the purchase of a vehicle. After being sued for payment due to delinquent payments, Ms. X argued that the loan agreement was void and that her financial obligation was disproportionate to her resources.

However, the Court of Cassation held that “the bank’s liability in granting a loan that is disproportionate to the borrower’s financial capacity cannot result in the annulment of the loan agreement; since Ms. X limited herself, in defending against the bank’s action for payment, to making such a claim, the argument—which is inoperative with respect to the annulment of the disputed contract—cannot be upheld.”

The Risks of Taking on Excessive Debt

It follows that, in this case, the First Civil Chamber did not reject the principle of a “duty of proportionality” incumbent upon the bank granting the credit but merely ruled on the applicable sanction.

If one reads this reasoning a contrario, it is possible to conclude that any breach by the bank of its duty of “proportionality” may indeed be sanctioned, but not by the nullity of the loan agreement it granted.

This decision is surprising in that the lender’s duty of “proportionality” had, for many years already, been superseded by its duty to warn. Case law had held that, to be exempt from liability, it was sufficient for the bank to provide evidence that it had “warned” the layperson borrower of the risks posed by taking on excessive debt.

In this particular case, and by ruling solely on the nature of the penalty applicable to the bank’s breach of its duty of “proportionality,” the Court of Cassation appears to be reversing its previous case law. It remains to be seen whether this decision is a one-off ruling or a genuine reversal of precedent…