In the banking sector, every international transaction raises a fundamental question: which national law should apply in the event of a dispute? The complexity of transactions, which cross borders and involve players of different nationalities, makes this question particularly sensitive. To answer this question, private international law has gradually established a major connecting factor. This article explores the importance of the law of the bank as a fundamental principle in international banking conflicts of lawsby analysing its application to bank accounts and transactions between credit institutions.
The principle of banking law: foundations and justifications
The primacy given to the law of the banking establishment is no accident. It is based on both practical and legal considerations. Firstly, case law and international texts, such as the Rome I Regulation, seek to attach a contract to the law of the country with which it is 'most closely connected'. In most banking transactions, the bank is the party providing the 'characteristic' service: granting credit, maintaining an account, issuing a guarantee. It is therefore logical that the law of its place of establishment should take precedence.
This approach also ensures the necessary uniformity. A bank handles thousands of standardised transactions. Subjecting each contract to the law of the domicile of each international customer would create unmanageable legal chaos and insecurity. Applying the law of the bank ensures consistency in the management of its commitments and compliance with the strict regulatory and prudential constraints imposed by its supervisory authority. This guarantees predictability for both the bank and its customers.
However, this principle of the law of the bank is not absolute. It coexists with another pillar of international contract law: the freedom of the parties to choose the law applicable to their contract. However, in practice, this choice very often leads to the designation of the bank's law, which the bank incorporates into its general terms and conditions. In the absence of an explicit choice, the body of evidence almost always points to the credit institution.
The concept of 'bank law': head office, branches and representative offices
Determining the "law of the bank" requires distinguishing the nature of the entity with which the customer contracts. The solution is different depending on whether it is the head office, a branch or a simple representative office. Case law considers a branch to be an autonomous entity in its dealings with customers. Thus, for a transaction concluded with a branch located in France of a bank whose head office is in Germany, the applicable law will be French law. The Rome I Regulation enshrines this solution by specifying that if the service is provided by a branch, the place of establishment is deemed to be the habitual residence.
This autonomy is justified by the fact that the branch is a permanent centre of operations, with its own management and materially equipped to deal with third parties. Third parties therefore do not have to contact the parent company directly.
The situation is radically different for a representative office. Its role is limited to providing information and acting as a liaison. Lacking autonomy and the capacity to enter into contracts, it cannot bind the bank. Transactions initiated through its intermediary will therefore be governed by the law of the bank's head office.
The impact of ring-fencing clauses
The distinction between head office and branch has given rise to specific contractual practices, in particular so-called "ring-fencing" clauses. These clauses, which arose in response to US court rulings forcing head offices to honour deposits made in their foreign branches that had become insolvent (due to political risks such as a moratorium or expropriation), have a simple objective: to limit the liability of the parent company for commitments made by its foreign branches.
In practical terms, a clause of this kind, often included in master agreements on derivatives or in certain credit agreements, stipulates that the creditor will not be able to take action against the head office if the foreign branch is unable to pay for reasons beyond its control. Although the French courts have not yet ruled on their validity, it is likely that they will be accepted in the name of freedom of contract, a fundamental principle of business law.
The law applicable to international bank accounts
The area of bank accounts is undoubtedly the one where the pre-eminence of the law of the bank is most strongly expressed. The agreement to open an account, whether for a deposit or a current account, is governed by the law of the country where the bank holding the account is established. This solution is necessary because of the technical, accounting and regulatory constraints on the bank. The bank can only keep its accounts in accordance with a chart of accounts and strict local customs, whatever the nationality of its customer.
The law of the bank therefore governs the entire contractual relationship: the conditions for opening and refusing to open an account, the operating rules, the terms and conditions for remunerating the bank, the conditions for closing the account and the bank's liability in the event of a breach. However, this principle can be tempered. In certain situations, particularly those involving loans, the law of the bank can be set aside in favour of consumer protection provisionswhich are considered to be of public order.
Distinction between current and deposit accounts
Although the law applicable to their opening does not differ, the distinction between deposit accounts and current accounts has practical implications. Deposit accounts record cash transactions (deposits, withdrawals). Current accounts, on the other hand, are characterised by the possibility of reciprocal remittances between the bank and its customer, creating a single, indivisible balance by merging receivables and payables. It is a technical instrument often used by professionals.
This distinction is important, particularly in the area of consumer credit. A simple overdraft on a deposit account may be classified as consumer credit and subject to the relevant protective legislation. On the other hand, case law considers that a debit on a business current account does not necessarily fall under this regime, even if the balance is negative. In this case, the overdraft is seen as a way of operating the account and not as a separate credit transaction.
The independence of the law governing the account from the transactions recorded in the account
It is essential to understand that the account agreement is a framework contract. It organises the "container", but not the "content". In other words, the law governing the account does not apply to the legal transactions recorded in it. Each transaction retains its autonomy and remains subject to its own applicable law.
For example, if a sum is transferred to an account to make a gift, the validity of this gift will not be assessed according to the law of the account, but according to the law applicable to the gift itself (often that of the donor's domicile). Similarly, if a payment is made in performance of an international sales contract, the validity of that payment will depend on the law applicable to the sales contract. The law of the bank governs the book entry mechanism, but not the cause or validity of the underlying obligation.
Specific features of interbank transactions and accounts
Determining the applicable law becomes more complex when both parties are banks. The criterion of the characteristic service becomes trickier to handle. Practice has developed pragmatic solutions, in particular through the distinction between "loro" and "nostro" accounts.
These Italian terms help to clarify the perspective. A "nostro" (our) account is an account that bank A holds on the books of bank B. This account will be governed by the law of bank B. Conversely, a "loro" (their) account is one that bank A holds on behalf of bank B. This account will be governed by the law of bank B. Conversely, a "loro" (their) account is an account that bank A holds on behalf of bank B. This account will be subject to the law of bank A. This account will be subject to the law of bank A. Each account is therefore legally distinct and subject to the law of the institution that manages it. This distinction makes it possible to transpose the logic of the bank-client relationship to the interbank world, by identifying each time the institution that provides the account management service.
This approach is also applied to other complex mechanisms such as syndicated loans and bank guarantees. For example, for determining the law applicable to bank guarantees and counter-guaranteesThe location of the guarantor or counter-guarantor is often a decisive factor, even if case law, particularly in England, has sometimes favoured other criteria such as the place of payment to ensure the beneficiary's legal certainty.
Mastering these principles is key to securing international financial transactions. A poorly drafted applicable law clause or ignorance of the conflict of laws rules can expose companies to significant legal and financial risks. For structuring your accounts or setting up interbank transactions, legal support from competent lawyers in the field is an essential precaution.
Sources
- Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I).
- Rome Convention of 19 June 1980 on the law applicable to contractual obligations.
- French Monetary and Financial Code, in particular articles L. 311-1 et seq. and L. 313-1 et seq.
- Civil Code, in particular the articles relating to contract law and securities.
- Consumer Code, in particular the provisions on consumer credit and over-indebtedness.
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