Since 1994 the First Civil Chamber of the Supreme Court has placed an effective burden on bankers to advise; the lender must direct the attention of the borrower to the risk of excessive borrowing.

The Commercial Chamber has always rejected this approach. It was only prepared to regard the lender as responsible if the following two elements existed :

This divergence has now been put to an end by judgments of 21 February, 3 May and 20 June 2005 which define an obligation to warn for a banker which is less demanding than the obligation to give advice. The two courts only impose this obligation when the borrower is not a professional.

Thus in future a banker must warn the non-professional lender of the risks of excessive borrowing having regard to his/her ability to repay, the appreciation of which must be taken into account when considering the expected revenue from the loan.

CNB [2006] 4 - Cour de Cassation, 1 ère Chambre civile, 21 February 2006 ,Pourvoi n°02-19066
The Court: - On the sole grounds of appeal, considering the first argument :

Having regard to article 1147 of the Civil Code;

Credit Lyonnais agreed on 20 July 1993 to loan to Mr and Mrs Y the sum of 300,000 francs to finance work on their principal place of residence. On 25 May 1994 , it loaned a further 190,000 francs for the purchase of an apartment for tenancy revenue. Following monthly payments not being made Credit Lyonnais claimed from Mr and Mrs Y the amount outstanding. The borrowers claimed the lender had failed to discharge its obligation to advise.

The findings of fact in the decision appealed from were that to accommodate the requests of Credit Lyonnais , the sums due had been paid for several years. Mr Y, who had been made redundant in February 1993 due to the economic downturn, had little chance of obtaining employment because of his age. If the rate of indebtedness as a result of the loans was at the outer limits of acceptability, Mr and Mrs Y were nevertheless property owners with, in addition to their principal place of residence, realty worth 1,000,00 francs and an investment portfolio worth, in March 1994, 425,682 francs (according to the appellants) or twice this amount according to the bank. The second loan was in fact for an investment property. Even if the bank had treated the loan as elevating the risk to the limit of what was reasonable, it had not been sufficiently demonstrated that the bank was at fault.

In reaching this determination, by not inquiring whether Mr and Mrs Y could be considered as borrowers on notice and that if they were not, whether the bank had warned them about the importance of the risk and thereby discharged its obligation to warn, the Court of Appeal had not applied the appropriate legal principles in its decision.

For these reasons, the decision was set aside and referred for rehearing before the Court of Appeal of Paris …

CNB [2006] 5 - Cour de Cassation, Chambre commerciale, 3 May 2006, Pourvoi n° 02-11211
The Court: According to the fact in the decision under appeal, in December 1994 and June 1996 the Commercial Indian Ocean Bank (BFCOI) agreed to give Mrs X two home loans for which her husband was guarantor. The loan repayments ceased in April 1998. BFCOI claimed default under the terms of the loan and informed Mrs X of this event by post on 12 January 1999.

On being pursued for payment, Mr and Mrs X had principally submitted that the bank had failed in its duty to give advice by giving Mrs X credit without having regard to her income (…).

On the first claim :

Mr and Mrs X complained that the judgment they appealed from absolved the bank of all liability when in fact:

However the judgment under appeal noted that the loan moneys had been taken out by Mrs X to finance repair and extension work for a villa that belonged to her and in this transaction she had been assisted by her husband, who was present when the documents were signed and carried out his duties as a senior adviser in the lending body, and who had for this reason every ability to understand the import of contractual obligations having regard to the financial capacity of the household. Given the knowledge that he had, the interest he had in ensuring his wife obtained all necessary information to understand the obligations she was entering into to improve their joint property, the Court of Appeal determined, without determining the other grounds, that the bank, which therefore had no duty to warn, had committed no error.

This ground of appeal was not made out.

Other grounds / [ no issue of law of interest]

CNB [2006] 6 - Cour de Cassation, Chambre commerciale, 3 May 2006 , Pourvoi n°04-15517
The Court:

The facts according to the judgment under appeal were as follows. During 1993 Credit Lyonnais, for the purpose of financing the purchase of two co-property title apartments in a building in Bordeaux, agreed to make several loans to Mr and Mrs X which they on turn hoped to repay, having been assured of this by the seller, from tenant revenue. These revenues proved to be insufficient. The husband, who had no unemployment insurance protection, then lost his job. Mr and Mrs X, facing the impossibility of meeting their financial obligations, had to have a mortgagee sale of their principal place of residence as Credit Lyonnais had used this as collateral for another loan entered into in 1994. The court held the bank had failed in its duty to advise of the risky nature of the kind of investment they had chosen and of the risk if they could not achieve the kind of fiscal return they were counting on getting. Mr and Mrs X claimed Credit Lyonnais should be liable. The Court of Appeal accepted their arguments and ordered the bank to reimburse Mr and Mrs X for the losses they suffered, notably the losses following the forced sale of their home.

On the first argument (first limb):

Having regard to article 1147 of the Civil Code;

The judgment appealed from had accepted the claim from Mr and Mrs X and held that Credit Lyonnais failed in its duty to advise and failed to draw to the attention of the borrowers the illusory nature of rental returns claimed by the vendor, having regard to the charges and outgoings inherent in an apartment building and to the difficulties of finding permanent tenants, which the bank could hardly have been unaware of, and also the impossibility that they would enjoy any financial advantages;

Setting up these schemes was an unrealisable dream as from the date of their being entered into. In June and October 1993 the borrowings in contention had been excessive having regard to the borrowing capacity of Mr and Mrs X, taking into account the revenues produced by the investment. What can be deduced is that the credit establishment had failed in its duty to warn and the Court of Appeal had failed to aply the appropriate legal reasoning.

As to the fourth argument put before the court: [no legal issue of interest]

For these reasons the judgment was set aside and the proceedings referred to the Court of Appeal of Toulouse .

CNB [2006] 7 - Cour de Cassation, Chambre commerciale, 20 June 2006, Pourvoi n°04-14114
The Court :

The judgment under appeal was sent back after annulment (Commercial Financial & Economic Chamber, 27 March 2001 , appeal no. 98 – 22.618). Mr X, an unemployed truck driver, and his wife, a housekeeper, obtained credit from the Union Bancaire du Nord (UBN) for the purpose of financing the purchase and renovation of a hotel. BDI Society intervened in the litigation on behalf of the financing party. The loan of 474 999 francs was agreed to in October 1991. There was no personal contribution to the loan, and four months later nothing had been paid. The vendor’s business profits had diminished consistently over the previous three years, principally by reason of his health problems, going from 246 000 in 1988 to 164 000 francs in 1990, the last year for which information had been available, while the annual charges for reimbursement of the loan, valued at 100 746 francs, when added to other charges, went up to 123,000 francs in 1990. Several months after these events Mr and Mrs X invoked the obligation of the bank and of the broker for failure to advise.

On the sole ground of appeal, first argument:

Having regard to article 1147 of the Civil Code:

When looking at the responsibility of the bank to warn layman investors, the judgment under appeal considered the feasibility of the project by comparing the figures available from the vendor with the annual charges for the loan and then determined that the loan of 100 746 francs was not excessive.

In arriving at this conclusion; without considering whether the cost of reimbursement of the loan could be supported from the funds for which the loan had been obtained and in giving little regard to how layman investors could obtain such information from the bank, the Court of Appeal did not give a proper legal basis for its decision.

Argument on the second ground of appeal: [no issue of interest].

Creating an internet site does not amount to setting up a point of sale
The internet has had a disruptive impact on networks for the distribution of goods. The Cour de Cassation has for the first time ruled on the question of whether creation of an internet site by a franchiser violates exclusive territorial rights clauses in franchise agreements.

The Court has ruled that the creation of internet sites does not amount to setting up a point of sale in the sector covered by the exclusive territorial rights clause. Therefore unless there is a contractual provision to the contrary, exclusive territorial rights clauses will not apply to, and will permit, the creation of a website by a franchiser.

However, this ruling will only apply to franchise agreements containing exclusive territorial rights clauses. The results could be different if the franchise contract contains an exclusive rights clause for the supply of goods. It means practically that the insertion of this clause requires the franchiser to use his distributor’s network for all sales taking place in the relevant sector

CNB [2006] 8 - Cour de Cassation, Chambre commerciale, 14 March 2006 , Pourvoi n° 03-14639  
The Court: On the first ground of appeal, considering the second argument:

Having regard to article 1134 of the Civil Code:

According to the judgment appealed from, in a franchise agreement entered into on 24 March 1998 Flora Partner (the franchiser) granted to the Company Laurent X Rouvelet LPR (the franchisee), a company managed by Mr X, exclusive rights until 24 October 2003 to operate a shop in the 6 th arrondissement of Marseille called “Le Jardin des fleurs”. This included use of the name and business know how. Article 7-3 of the agreement stipulated: “The provision for exclusive territorial rights means the franchiser undertakes, for the duration of the agreement, not to authorise the opening of other points of sale for “Le Jardin des Fleurs” in the restricted area defined above without the authority of the franchisee.” At the end of 1999 the franchisee opened an internet site called “Le Jardin des fleurs”. The judgment appealed from held that the franchiser had violated his contractual guarantee for the franchisee to have sole operation rights in the restricted area and awarded payment of damages and interest for breach of contract to the franchisee and to Mr X.

The judgment appealed from held the contract was breached solely by the tortious acts of the franchiser because the territorial restriction clause was fundamentally intended to protect the franchisee from any sales by the franchiser, directly or indirectly, in the restricted area. Sale on the internet, although a sale of a passive nature, was capable of amounting to a breach of this exclusive right in that the sale was made without any financial benefit to the franchisee who was in fact contributing to the running of the site by reason of the advertising fee he was paying to the franchiser.

However, without disputing this finding, while it was the case that the agreement signed by the parties contained a guarantee of exclusive territorial rights, the creation of an internet site did not amount to creating a point of sale in the protected geographical area. Thus, the Court of Appeal had failed to have regard to the provision in question, regardless to regulation n° 2790/1999 of 22 December 1999 of the EEC which is not applicable/relevant in this matter.