The concept of indivisibility in financial arrangements
Indivisibility means that contracts that are formally distinct but economically interdependent can be viewed as a whole. It is a decisive factor in financial transaction litigation, particularly when a borrower seeks to challenge a package.
Indivisibility refers to the idea that several contracts form an indivisible whole, with the disappearance of one leading to the disappearance of the others. This concept applies particularly to arrangements combining a loan and an investment, such as those combining a bullet loan and life insurance.
There are two conceptions. Objective indivisibility is based on material elements linking the contracts, independently of the will of the parties. Subjective indivisibility is based on the intention of the parties and requires proof of a common will to consider the contracts as interdependent.
A judgment of the First Civil Chamber of 1 October 2014 favours an objective conception, while the Commercial Chamber, in a judgment of 5 November 2013, maintains a subjective approach by seeking the intention of the contracting parties.
Criteria for assessing indivisibility
The courts rely on a number of indicators to determine indivisibility. The concomitance of contracts is one indicator: contracts entered into on the same day or on close dates suggest interdependence. The identity of the parties is another criterion - when the same people are involved in the different contracts.
The amount of the transactions plays a role. When the amount of the loan corresponds to the amount paid into a life insurance policy, this correspondence reinforces the idea of indivisibility. The circulation of funds is also revealing: the direct payment of borrowed funds to the insurer, without passing through the borrower's account, suggests the uniqueness of the transaction.
The intention of the parties remains central to the subjective approach. This intention may be inferred from pre-contractual correspondence, promotional documents presenting the transaction as a whole, or the pledge of the insurance contract in favour of the lender.
The Court of Cassation has indicated that indivisibility is not accepted when the contracts involve different companies or have an independent financial purpose. This obstacle often arises when the life insurance and the loan have been taken out with separate institutions, even if they belong to the same group.
The legal consequences of indivisibility
Recognition of indivisibility has important repercussions. It enables an overall assessment of the transaction and the risks it entails, with the package being judged as a whole.
This approach has implications for the assessment of professionals' obligations to provide information and advice. The courts consider that the accumulation of contracts makes the transaction more complex and risky than an ordinary transaction, justifying a strengthening of the professional's duties.
Indivisibility can change the qualification of the borrower. An investor could be considered knowledgeable for a simple loan, but not knowledgeable when faced with a complex financial package. The courts assess whether the borrower was able to understand the risks associated with the interaction of the contracts, and not just those specific to each contract.
Indivisibility means that the criteria for assessing professional obligations can be adapted. Unit-linked life insurance is not generally considered speculative. However, when included in a package with a bullet loan, the transaction may be considered riskier, justifying a heightened duty to warn.
Impact on borrower recourse
Indivisibility extends the possibilities of recourse. The nullity of one of the contracts entails the nullity of the others. A defect in the life insurance contract could have an impact on the back-to-back loan.
This logic produces effects in the case of life insurance. The borrower has the right to cancel the life insurance policy. If indivisibility is recognised, exercising this option would result in the associated loan lapsing. This solution, recognised by the First Civil Chamber in 2014, opens up an avenue for disappointed borrowers.
Indivisibility unifies the applicable liability regime. The courts may consider the breach at the level of the package, without dwelling on the precise characterisation of the duties breached. A 2013 ruling by the Angers Court of Appeal held the bank liable for proposing "an unsuitable package" as a whole.
Borrowers have an interest in invoking indivisibility when challenging a financial arrangement. This qualification makes it easier to prove that they are uninformed and increases their chances of having a breach of the obligations to provide advice or warnings recognised.
The divergence in case law and its practical implications
Case law remains divided on the issue of indivisibility. Some decisions reject it when the contracts do not have the same parties, dates or amounts. The Paris Court of Appeal refused to recognise the indivisibility of loans and life insurance policies taken out with separate entities.
Other decisions adopt a more flexible approach, deducing indivisibility from indicators such as the concomitance of contracts and the direct circulation of funds. This trend appears to be growing, particularly under the impetus of the First Civil Chamber.
For the borrower, the strategy is to highlight the elements that suggest the economic unity of the transaction: commercial documents, correspondence, direct financial flows. For financial institutions, the strategy is to fragment the transaction by emphasising the autonomy of each contract.
Indivisibility means that an unfavourable package can be challenged as a whole, whereas rejection means that each contract has to be challenged separately, with reduced chances of success.
Indivisibility can also protect professionals. If the borrower has requested the arrangement or if he or she has been warned about this type of transaction, indivisibility could limit financial institutions' obligations to provide information and advice.
Sources
- Civil Code, article 1186 on the indivisibility of contracts
- Cass. 1st civ. 1st October 2014, no. 13-21362
- Cass. com. 5 November 2013, no. 2013-024832
- CA Paris, 10 October 2013, no. 2013-022292
- CA Angers, 2 October 2013, no. 2013-017972
- D. Legeais, "Bank liability and financial engineering", 2015
- J. Djoudi, "La renonciation au contrat d'assurance-vie", 2015
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