Case Studies in Banking Law: Insights from Practice and Application to Theory

Banking law is a vast and constantly changing area of law that has been developed through significant precedent-setting cases and regulatory reform. Contributors to Bankers’ Law ensure our readers have concise yet practical summaries of landmark banking case law that has shifted the landscape of banking law and practice. This page highlights a selection of landmark cases in various jurisdictions that reflect the application of the law between key stakeholders. This is necessary reading for lawyers, academics, and participants in the finance industry alike who want to be aware of the most relevant banking case law.

Case Study: Barclays Bank plc v Quincecare Ltd (1992)

The Quincecare case is the landmark authority in English banking law on a bank’s duty of care when processing customer instructions. The facts in the case were as follows: Barclays Bank was sued after it had paid funds contrary to instructions from its corporate customer. The court ruled that a bank is under a duty not to execute a payment order if it is on inquiry and has reasonable grounds for believing that the order is an attempt to misappropriate funds. This decision created what is now known as the Quincecare duty, which is applied by banks and financial institutions to decide whether an instruction should be honoured having regard to the risk of fraud.

In practice, the impact of this case is that banks and financial institutions have developed internal procedures for working out whether a transaction is unusual or suspicious, as well as responding more rigorously to a request that does not seem to add up, even if apparently permissible. More recently, the Quincecare duty has continued to be relied on in litigation involving sophisticated internet banking scams and other similar kinds of fraud.

Cross Border Insights: UBS AG v Kommunale Wasserwerke Leipzig GmbH (2014, Germany/UK)

This prominent case was essentially a dispute relating to derivative contracts in which UBS, the Swiss bank, was involved with a German municipal company. The German party claimed that the transactions were invalid because they did not have the proper corporate authorisations and breached German law. The English Courts, applying choice of law rules, considered the implications of English contract law versus German companies law in this case.

The case has once again brought into sharp focus the need for extensive due diligence and documentation, as well as awareness of local laws when establishing cross border financial arrangements. For the practitioner, UBS v Kommunale Wasserwerke Leipzig is a stark reminder of the difficulties of enforcing court orders in different jurisdictions, where a clear implication is that banks must be cognizant of both home and foreign legal systems when putting together transactions.

Investor Protection Cases: The Parmalat Scandal (Italy, 2003-2007)

The fall of Parmalat, Italy’s largest dairy producer and conglomerate, resulted in the prosecution of numerous major international banks as enablers of fraudulently issued bonds and providing inaccurate financial information. Investors asserted and proved that banks failed to adequately conduct due diligence and misled the markets. The ensuing proceedings in Italy, the United States, and other jurisdictions tested the parameters of bank responsibilities as lenders and underwriters.

The case highlighted the legal concepts based on transparency, disclosure, and investor protection. According to the results of the US litigation, these actions had a rippling effect, with financial institutions worldwide putting in place more stringent compliance, particularly focused on anti-fraud measures, client screening and vetting, and risk disclosures. The legacy of Parmalat has shaped best practice for the syndicated loan market and the bond market.

Bailout / Recapitalisation Cases: The Hypo Real Estate Group (Germany, 2008-2010)

The global financial crisis in 2008 saw unprecedented strains on banks, with no bank suffering more than Hypo Real Estate in Germany. In need of a bailout due to insolvency, the bank was saved following a multi-billion-euro lifeboat plan involving German authorities in conjunction with the European Central Bank. The case study shows the legal issues involved in government bail-outs, the structuring of State recapitalisation plans, and negotiation between the interests of public and private creditors.

The hypothecation of Hypo Real Estate led to major legislative developments in Germany and the EU concerning higher capital requirements and resolution regimes for distressed banks. On the legal front, practitioners continue to cite this case as a guide to crisis management and the legal limits of State aid.

Syndicated Loans / Lender Liability Cases: Banco Santander v EcoWorld Group (Spain/UK, 2017)

In this case, Banco Santander and a group of lenders made a substantial syndicated loan to EcoWorld, an international property developer. When EcoWorld defaulted, issues arose with respect to the obligations of various members of the syndicate to one another and the applicability of cross-default provisions. The Spanish and English courts considered the actual wording of the contracts, the conduct of agents, and liability for lenders in Spain and England.

The decision confirms that members of a syndicate must follow the prescribed decision-making process and that transparency is key to avoiding liability. The case is now widely cited in connection with complex loan structuring and when drawing up protection for inter-lender arrangements.

Digital Banking / Cyber Fraud: Commonwealth Bank of Australia v Smith (Australia, 2020)

Digital banking is now commonplace. As a legal risk, cyber fraud has taken on increased significance. In Commonwealth Bank of Australia v Smith [2017] NSWCA 265, the bank was sued after computers of an account holder were compromised and funds stolen via a phishing scam. The court considered the scope of the bank’s duty of care, whether its security processes were adequate, and the apportionment of loss between the customer and financial institution.

The judgment underscored the importance of banks adopting cutting-edge cybersecurity measures and customer education about online threats. Australian and overseas lenders have since revised their terms and conditions, and this case provides helpful authority for lawyers advising on liability for frauds in digital banking.

Litigation / Disputes: Credit Suisse and Greensill Capital (Switzerland/UK, 2021-2022)

When Greensill Capital collapsed, a whole series of legal actions involving Credit Suisse followed, as Credit Suisse had managed investment funds which had been exposed to assets from Greensill. Investor clients complained of failed risk management, disclosure, and oversight. Court proceedings have explored various issues in Switzerland and the UK, such as the role of banks as third party intermediaries, obligations to investor clients, and the cross-border coordination of insolvency processes.

The continuing litigation is influencing how banks approach third party risk and is leading to increased regulatory scrutiny of non-core banking activities. The case demonstrates how banking law is evolving to meet the challenges of financial innovation and disruption in the market.

Court Cases: French Court Ruling on Negative Interest Rates (France, 2016)

When negative interest rates became the norm in Europe, French courts were regularly tasked with resolving disputes between banks and debtors regarding the interpretation of loan agreements. In a significant ruling in 2016, the Cour de cassation determined that, in the absence of any express term, loan agreements did not create an obligation for banks to pay interest to debtors when rates were negative.

This decision prompted a wave of contract amendments among financial institutions across Europe and spurred efforts to better inform clients about the risks associated with negative rates. For legal professionals and those in the finance sector, this case serves as a pertinent reminder of the potential effects of monetary policy on contractual agreements and underscores the necessity for precise language in loan agreements.

Case Studies Are for Practitioners: Practical Insights and Understanding

Each of these case studies reflects how legal principles are applied and refined in a practical setting. For banking lawyers, understanding the decisions is critical in order to provide sound advice, prepare clear documentation, and to avoid cross-border pitfalls. For finance professionals and students, case studies show how the theory plays out in a practical sense.

At Bankers’ Law we understand that learning from precedent is the key to successful innovation, compliance, and the upholding of ethics in the banking industry. Our case studies section is updated regularly and as new developments and trends emerge.

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