We now have a new Act on Special Measures for the Adjudication of Cases Concerning Loan Agreements Denominated in or Indexed to the Swiss Franc. The provisions come into force 14 days after publication. So now is a good time to look at what lies ahead and what banks should be doing today.
Automatic suspension of repayments: immediate effect, widespread impact
Upon service of the claim on the defendant, or service of the counterclaim on the claimant, the consumer’s obligation to make payments under the loan agreement is suspended until the proceedings are finally concluded.
This is nothing new; courts have previously granted such interim relief. What is however new is that this occurs automatically, by virtue of the Act itself. For banks, this means that any such claim results in a “freeze” on the repayment obligation, regardless of whether they are prepared for it.
A consumer’s suspension of payments does not constitute a breach or improper performance of the contract, and the defendant may not draw any consequences from this – including terminating the contract or reporting arrears, for example, to BIK, credit reference agencies, subsidiaries of banks, or lending institutions.
Furthermore, in the event of such a report, within one month of the date of service, the lender is obliged to notify the relevant institutions of the suspension of the obligation to make payments, and those institutions must remove the data from their registers. They have one month from the date of receipt of the notification to do so.
A bank which, prior to the commencement of the dispute, had already recorded the borrower’s arrears in the registers must remove these entries on its own initiative and within the statutory time limit, regardless of whether its assessment of the validity of the consumer’s claims is positive or negative.
Claims for repayment of the principal – extended counterclaims and the open question of banks’ separate actions for recovery of the principal advanced
One of the instruments in banks’ litigation strategy is the bringing of separate claims for repayment of the principal advanced. The Act does not preclude this mechanism. Moreover, the new provisions extend the existing procedural options in this regard.
A counterclaim may be brought right up until the conclusion of the hearing before the court of first instance, and, where the case is to be heard in closed session, right up until the delivery of the judgment.
This is a significant change: the previous provisions of the Code of Civil Procedure required a counterclaim to be brought at the latest in the statement of defence or – if no such statement was filed – before entering into the substantive dispute. The new regulation extends this time limit, giving the bank considerably more time to make its decision, taking into account the direction in which the main proceedings are heading.
At the same time, the court with jurisdiction over the main claim will also rule on the counterclaim, regardless of the value of the matter in dispute. This eliminates the complications that previously arose in cases involving very high amounts.
One practical issue remains unresolved. The court may sever the counterclaim for separate determination if hearing it together with the main claim could lead to undue delay in the proceedings.
Given that the Act’s stated purpose is to expedite Swiss franc cases, and that counterclaims by banks may complicate and prolong such proceedings, it can be assumed that courts will be inclined to make use of this severance provision. Whether this mechanism will prove an effective substitute for a separate standalone claim for the principal, or whether it will routinely be severed into separate proceedings – thereby depriving the bank of the intended benefit – is a question the Act leaves open. The true picture will emerge with time.
Set-off after proceedings have been brought – an instrument that has become a cost trap
Until now, the submission of set-off notices during proceedings allowed a bank to effectively reduce the amount of the consumer’s claim by presenting a counter-claim for set-off (e.g. for repayment of the principal). The new Act penalises this practice.
If, after proceedings have been brought, the lender has submitted such a notice and the consumer has not contested its validity, the bank bears the costs of the proceedings to the extent that the claim was dismissed as a result of the set-off being upheld – regardless of the overall outcome of the case. The words “regardless of the overall outcome of the case” are of critical significance here: the bank pays even where its set-off was substantively justified and effectively reduced the scope of the awarded claim.
The same rule applies where proceedings are discontinued because the consumer has withdrawn their claim following a set-off made by the bank. In other words, even where the bank has successfully set off a counter-claim and caused the action to be withdrawn, it still bears the costs. The previous calculus – under which the withdrawal of a claim was seen as a success for the bank – requires thorough reconsideration.
Procedure – faster, but at a high price
The Act amends the course of proceedings in several areas of significance to banks:
The court of first instance may hear the case in closed session even where the parties have applied for an oral hearing. It need only inform the parties of the reasons and allow them at least two weeks in which to submit written submissions. In practice, this means that the court may disregard the bank’s application for an oral hearing – including for the examination of the parties on the question of whether the consumer was informed of the exchange rate risk.
The court may also permit the parties to be examined in writing, serving them with a list of questions together with a notice of the possibility of being summoned to a hearing. For the bank, this represents a significant weakening of its position. The examination of the consumer regarding their awareness of exchange rate risk – until now one of the most important elements of the bank’s defence – loses much of its effectiveness where there is no opportunity directly to test the credibility of that testimony.
The grounds of the first-instance judgment may also be limited to a reference to the parties’ pleadings and to the relevant statutory provisions. Such an abbreviated statement of reason makes it difficult for the bank to assess whether, and on what grounds, to appeal.
Both cases and interlocutory appeals are heard by a single judge, at first and second instance alike –notwithstanding that the complexity and value of the subject matter have hitherto justified a panel. The appellate court may equally rule in closed session, even where a party has applied for an oral hearing – further limiting the bank’s ability to influence the course of the proceedings directly.
The supreme court’s acceptance of a cassation appeal no longer guarantees that it will be heard
Even where the Supreme Court has already accepted a bank’s cassation appeal, it may reverse that decision and refuse to hear the appeal, provided it takes the view that the case no longer raises a significant point of law or requires the interpretation of provisions giving rise to doubt, and that the grounds set out in Article 398⁹(1)(3) or (4) of the Code of Civil Procedure have not been satisfied.
This decision is taken by a single judge in closed session. Moreover, in the event of a refusal, the bank will not be reimbursed for the cassation appeal fee – and so it therefore loses both its prospect of a ruling and its money.
Transitional provisions: immediate and retrospective effect
The effects of the Act are far-reaching and extend to cases already pending.
The Act applies to all cases that have been commenced and have not yet been concluded, with one exception: where a panel of three judges has already been constituted, the case shall continue before that panel.
The suspension of repayments also applies to cases in which the statement of claim has already been served, taking effect on the date the new provisions enter into force.
Pending interim proceedings concerning the suspension of repayments, as well as any interlocutory appeals in such proceedings, are discontinued by operation of law. Interlocutory appeals lodged after the Act comes into force are to be placed on the case file and left without consideration.
Banks have two months in which to notify BIK, credit reference agencies, and other institutions of the suspension of repayments in all pending cases where arrears have been reported.
The new costs rules relating to set-off apply retrospectively, encompassing set-off notices submitted prior to the Act’s entry into force.
The swiss franc act – what banks should do now
The Act is entering into force. From the bank’s perspective, it is now advisable to ensure the following:
- Review of the Swiss franc litigation portfolio – identifying all pending proceedings, with particular attention to cases in which entries have been made in credit registers or set-off notices have been submitted
- Compliance with the obligation to notify BIK and other institutions – the statutory two-month deadline from the date of entry into force is mandatory, and failure to meet it will constitute a breach of the law
- Review of the viability of pending cassation proceedings – in light of the possibility that the Supreme Court may withdraw its acceptance of a cassation appeal, and the provision for the refund of half the court fee for an appeal withdrawn within six months of the Act coming into force
- Revision of strategies for recovering the principal – taking into account the extended time limit for bringing a counterclaim and the removal of jurisdictional restrictions in this regard
- Review of set-off notices already submitted – to assess the attendant costs risk
The Act changes the rules of the game with immediate effect, and the vast majority of the changes are one-sided: they strengthen the consumer’s position at the expense of banks.
The banks’ response cannot be to wait. It must be a swift and considered procedural and operational reaction.
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