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12 May 2006
Contractual relations between bank and client
Section 117(2) of the Federal Act on Private International Law: characteristic performance
In theory, the contractual relations between client and bank are subject to Swiss law as Switzerland is the place of performance of the contract, regardless of the client's place of residence, domicile or citizenship.
According to Section 117(1) of the Private International Law Act, in the absence of a choice of law, the contract is subject to the law of the state with which it is most closely connected. The closest connection is deemed to be with the state in which the party called upon to provide the characteristic performance has its ordinary residence or business establishment.
Pursuant to Section 117(3) of the law, the 'characteristic performance' is deemed to be, in the case of mandates, the services to be performed and, in the case of a safekeeping contract, the performance of the safekeeper.
Given that the relations between a bank and its clients can be characterized as a mandate agreement, a safekeeping agreement or possibly a loan agreement, the characteristic performance shall be that of an agent (a safekeeper or lender respectively), with the result that Swiss law shall apply.
Choice of law and jurisdiction
With regard to characteristic performance, in practice, the bank account opening forms and general conditions provide that Swiss law will apply and Swiss courts will have jurisdiction over any dispute. Such choice of law and jurisdiction clauses are perfectly valid under Section 5 of the law.
Therefore, Swiss contract law will govern bank/client relations and Swiss courts shall in most cases have exclusive jurisdiction to resolve possible disputes.
However, interference, if not a conflict of laws, is likely to occur upon the demise of the account holder, because other laws may become applicable with respect to estate and matrimonial property issues. Regardless of the relations between the bank and its client, third parties are entitled to obtain information directly from the bank pursuant to independent rights conferred on them by the Civil Code.
The customer's death does not terminate the bank's obligations as an agent or safekeeper. When the client dies, his or her heirs acquire in particular all rights resulting from the banking relations.
Identifying the heirs and determining their rights to the assets deposited with the bank are issues to be determined by the law applicable to the estate.
Swiss domiciled client
The estate of a Swiss national resident in Switzerland shall be subject to Swiss law and Swiss courts shall have jurisdiction.
The same is true for the estate of a foreigner domiciled in Switzerland, except where the deceased decided to opt for his or her national law as he or she is entitled to do so under Section 90(2) of the law.
Foreign domiciled client
The estate of a client whose last domicile was abroad shall be governed by the law to which the conflict of law rules of the state of domicile refer (Section 91 of the law).
In general, Swiss courts do not have jurisdiction to resolve disputes that may arise between the heirs of or with third parties related to the estate.
However, Swiss courts are competent to order protective or conservatory measures pursuant to Section 89 of the law, including the following:
Pursuant to Section 88 of the Private International Law Act, Swiss courts have jurisdiction over the estate's property in Switzerland to the extent that the foreign authorities fail to deal with it.
Duty of the bank to inform the heirs
In theory, heirs are to be informed about the situation of the account at the time of the death of the account holder.
It is generally admitted that the heirs' right to information may cover transactions carried out before death when it is necessary to safeguard their rights against the bank or third parties (eg, other heirs), or when it is suspected that the forced heirship rules have been breached (Sections 522, 527 and 626 of the Civil Code).
The position of an 'ordinary' heir (ie, one who does not benefit from a compulsory portion of the estate) remains reserved when the bank can be suspected of having failed to perform faithfully its duties as an agent. In such case the heir is entitled to information covering the period preceding death so as to check that the bank has properly carried out its obligations (Section 400 of the Swiss Code of Obligations). The investigation can go back as far as 10 years prior to the date of the request. It is considered that the right of the deceased as principal within the framework of the mandate relations with the bank passes to the heirs, who acquire the same rights as those vested in the deceased.
In 2002 the Swiss Bankers Association issued a circular letter outlining banks' obligations with regard to their duty to inform the heirs of a deceased account holder.(2)
The policy recommended by the Swiss Bankers Association is rather liberal as the banks are invited to provide information, upon the express request of the heirs, covering transactions that took place during the lifetime of their deceased client, to the extent that the deceased's rights have passed to the heirs by inheritance and as long as the bank still has the relevant documentation.
The banks may refuse only where highly personal interests of the deceased may be at risk or where the information request seems unwarranted.
Scholars also consider that when the bank knows that the account holder is not the beneficial owner of the assets, it may have to inform the heirs of the deceased beneficial owner of the existence of the account and the name of the account holder acting as a trustee or in another fiduciary capacity, especially where the bank may suspect that the fiduciary may not act in conformity with its duties.(3)
According to recent Geneva case law,(4) heirs contending that the compulsory share of the estate to which they are entitled pursuant to the forced heirship rules has been damaged may request information from the bank regarding the assets held by what is usually referred to as an 'estate vehicle' (eg, a trust, a foundation or an offshore company whose beneficial owner was the deceased). The right to obtain information, based on Section 400 of the Swiss Code of Obligations, is subject to the following conditions:(5)
On September 10 2003 the Geneva High Court ordered a bank to provide the banking documentation as of the date of death of the beneficial owner and the bank account statements for a period going back as far as 10 years before the request was made to the bank.
Documents to be provided by a heir seeking information
The heir should provide a death certificate and documents proving his or her status as a heir (eg, a certificate of inheritance, documents established by a notary public and a grant of probate proving the heir's or executor's access to the estate).
Where the probate is opened in a foreign country, the document to be presented to the bank must be legalized before a Swiss consulate or apostilled under the Hague Convention.
Disposing of the assets
Contrary to what is still all too often wrongly assumed, even if provided with a will or a letter of instructions left by the deceased indicating whom the beneficiary of the account should be, the bank may not remit the funds to such named beneficiary. The bank may act only on the basis of instructions given by: (i) the executor, if any; and (ii) all of the heirs acting in common or, failing such agreement, on the basis of a court decision resolving their dispute.
In the absence of such instructions, the bank will freeze the account.
A bank holding a will or a letter of instructions dealing with the account must file the same with the competent authority (in Geneva, the Justice de Paix) if the estate is subject to Swiss jurisdiction.
Determining the law applicable to matrimonial property relations may prove to be a rather complex exercise as different laws may govern the relations between the spouses themselves and their relations with third parties.
Pursuant to Sections 52, 54, 55 and 57 of the Private International Law Act, matrimonial property relations may in particular be subject, depending on the circumstances, to the law chosen by the spouses or, if they have not made a choice of law, to the law of the state in which both have their domicile contemporaneously or (if this is not the case) last had their domicile contemporaneously. If none of these conditions is met, the law of their common nationality shall apply. Failing that, Swiss law shall ultimately become applicable.
Duty of information
The Civil Code provisions devoted to the effects of marriage in general in the new matrimonial law enacted in 1998 have introduced a reciprocal duty of information as regards the financial situation of spouses.
Pursuant to Section 170 of the Civil Code, each spouse may request information with regard to income assets and debts.
Should the requested spouse fail to comply with this duty, the other spouse may request the judge to oblige the spouse or a third party to give the information required and produce the necessary documents.
The information requested must be relevant for safeguarding the plaintiff's rights under the provisions of the Civil Code dealing with the effects of marriage in general and matrimonial property.
Insofar as the request for information is addressed to a third party, Section 170(3) of the code excludes from the circle of third parties requested to disclose information only lawyers, notaries, medical doctors, and ministers of the church and their staff. Banking secrecy is not protected.
However, Section 170 does not enable a spouse or his or her lawyer to request information directly from a third party. As a result, a bank can be forced to provide information only through a court decision that may be subject to Section 292 of the Criminal Code (ie, non-compliance by the banker may constitute a criminal offence, with the result that banking secrecy can be lifted).
Power of attorney valid post-mortem
Power of attorney valid during the lifetime of the account holder and after death
In the absence of any provisions to the contrary, a power of attorney or mandate will usually lapse at the time of death of the principal. However, pursuant to Section 405 of the Swiss Code of Obligations, the account holder may provide that the power of attorney granted to a third party to operate the bank account is to remain in force after his or her death.
The reasoning behind the post-mortem effect of the power of attorney is that the proxy holder should be able to complete the transactions that have been entrusted to him or her without any interference resulting from the account holder's death. Often, the power of attorney is aimed at enabling the proxy holder to take care of ordinary expenses (eg, rent, insurance premiums and medical expenses) prior to the death of the account holder should he or she become incapacitated, and also after his or her death.
The fact that a power of attorney has been granted by the deceased to one of the heirs bears no incidence as to determining the shares of various heirs in the estate. The power of attorney does not work internally (between the heirs), but only externally (ie, with regard to third parties, such as the bank).
During the lifetime of the account holder, the bank is entitled to carry out
instructions received from the proxy holder in theory without having to check
that the transactions are in line with the agreement existing between him or
her and the account holder.
After the account holder's death, the situation is different, as at the time of demise the heirs acquire all of the deceased's rights and obligations resulting from the mandate agreement. Therefore, it is up to them to decide to cancel or ratify the power of attorney.
Where there is more than one heir, it is usually considered that one single heir is entitled to cancel the power of attorney.(6) It would be unfair if one single heir who could also be the holder of the power of attorney could object to the termination of the mandate.
With regard to the bank's position, if it does not know about the account holder's death, the bank is under no duty to check whether its client is still alive. Should the client die without the bank knowing of the death, it will face no liability if it carries out instructions received from the proxy holder, even if the latter instructs the bank to transfer out all of the assets held on the accounts.(7)
If the bank has learnt of the account holder's death from a friend, an heir or an obituary and the client is a politically exposed person, it will be assumed that the bank has been informed of the account holder's death by the mass media.
In this situation, the bank must be extremely cautious as the death of the account holder does not put an end to the mandated relations. Therefore, the bank is still bound by Section 398(2) of the Swiss Code of Obligations, pursuant to which it is responsible to the principal for the faithful and careful performance of the mandate and execution of its fiduciary duties.
Where the representative is using his or her power in a manner that could be perceived by the bank as being in the best interests of the heirs or the estate, the bank can carry out his or her instructions without risking liability.
The situation is different where the bank is faced with a request from the representative to transfer all of the assets to another account. Although in theory the bank need not concern itself with the internal relations between the deceased client and his or her representative, it must nevertheless forge its own opinion on these relations when the question arises as to whether the rules governing the devolution of the estate have been circumvented by the representative.(8) If there are any doubts surrounding the validity of the representative's dealings, the bank has a duty to inform the heirs before carrying out the instructions. In a 1999 decision, confirmed by the Federal Court in 2000,(9) the Geneva High Court held a bank liable to repay heirs the value of assets that had been transferred by a representative exercising his power on the basis of a post-mortem proxy three months after the death of the account holder.
Therefore, banks are well advised, if they know or should have known about the death of their client, to obtain the heirs' approval before executing instructions received from the post-mortem proxy holder, except in cases where it is clear that the transactions are carried out in the best interests of the estate and are not aimed at eluding the rules governing the devolution of the estate.
Finally, the liability risk borne by the bank if it chooses not to carry out the instructions of a proxy holder appears limited as, under the procedural principle that a legal action may be introduced only by the principal and not its representative, the proxy holder has no standing per se to sue the bank.
Power of attorney valid only after the death of the account holder (mandate
A person may wish to grant a power of attorney that shall come into force only after his or her death. This scheme is not illegal and its validity is even recognized by Section 517 of the Civil Code in connection to the executor.
By issuing a power of attorney valid only after his or her death, the bank's client usually wishes to organize the devolution of the funds deposited with the bank to the heir(s) privately, without having to go through a probate procedure in the country of residence of the deceased which in many cases cannot be undertaken by the estate for tax reasons.
Such a power of attorney, although possible in theory under Swiss law, will nevertheless be considered as a will under Sections 498 and following of the Civil Code. This means that the document must conform to the formal requirements provided by Swiss law, and will be null and void if these are not met.
The post-mortem power must be in holograph form (ie, it must be entirely written by hand by the bank's client). In addition, the document must indicate the date of execution (Section 505 of the Civil Code).
Scholars have questioned the validity of the post-mortem power, stressing that this scheme may not be used to carry out provisions that should normally be contained in a will. In addition, the post-mortem proxy valid only after death could be used in a way that circumvents the applicable rules governing the devolution of the estate. This is the reason why as early as 1973 the Swiss Bank Association issued regulations advising its members not to accept any power of attorney that comes into force only after the death of a client.(10)
Ordinary joint account
A joint account is an account which may be operated by two or more holders, any of whom may act collectively or individually.
At the time of death of one of the account holders acting collectively, all of his or her rights relating to the contractual relations will pass to the heirs, with the result that the bank will be in a position to act only upon receiving unanimous instructions issued jointly by the heirs and the remaining account holders.
In the case of holders acting individually, each account holder is severally entitled to dispose of the account and the bank is fully authorized to act without seeking permission from the other account holders. With regard to the bank, each account holder is entitled to dispose of all of the securities and cash deposited with the bank (active solidarity). Conversely, they are severally liable to the bank for any debts on the account (passive solidarity).
There are many reasons for setting up a joint account and they depend on the internal relations between the account holders. The holders may have entered into a partnership agreement, may be co-owners of the assets or may be bound by an agency relation. It follows that the different account holders are not necessarily the owners of the assets deposited with the bank.
In theory, in any event the bank should not be concerned with the internal relations existing between the account holders that prompted the opening of the joint account. However, whether this opinion which has been advocated by scholars(11) is still fully valid is questionable. The development of anti-money laundering regulations incorporated in the Swiss Banks Code of Conduct, the Swiss Bank Commission Regulations, the Federal Law on Money Laundering and Section 305 of the Criminal Code requires the bank to ascertain the economic background justifying the opening of an account. At a minimum, the bank must determine who is the beneficial owner of the account. If the bank should find out or reach the conclusion that one of the joint account holders is blatantly using his or her rights to dispose of the account in breach of the internal arrangements existing between the different account holders, it cannot be ruled out that the cooperating bank could incur liability under Section 398 of the Swiss Code of Obligations.
According to Professor Luc Thévenoz, the banker cannot simply ignore, within the framework of contractual relations with his or her clients, information gathered while carrying out due diligence duties under the Banking Law or other public law provisions. This information may become relevant to the court when deciding whether the banker has acted in good faith or has shown the care expected.(12)
Caution is recommended and the bank would be well advised in case of doubt to request the other account holders to confirm instructions received. The bank may also unilaterally decide to block the account for a limited period to enable account holders who disagree with the instructions received by the bank to obtain provisional measures from the court, ordering the freezing of the assets.
With the exception of joint accounts with a clause excluding heirs, the heirs of a deceased joint account holder succeed in the joint account relations.
The community of heirs acquires all rights of the deceased joint account holder with regard to the bank and, if they act in common, they may order the bank to dispose of the assets held on the account.
A controversial issue is whether only one of the heirs of the joint account holder may request the account to be frozen by the bank until all heirs have reached agreement on the fate of the account. In 1994 the Federal Court held that the request of an heir intending to freeze the assets was not valid;(13) by this reasoning, the assets should be remitted to the account holder who first requested the bank to effect the payment. This decision has been criticized by scholars,(14) who have voiced the opinion that the heirs of a deceased joint account holder acting jointly have the right to request the bank to freeze the account. The reasoning is that if they are entitled to request the withdrawal of all of the assets, they should be entitled to request the bank to take less drastic measures.
Joint account with exclusion of heirs
Pursuant to the general conditions of a number of banks, the joint account becomes a single account upon the death of one of the two account holders, with the result that the contractual relations with the bank will remain effective only between the bank and the surviving account holder, to the exclusion of the heirs of the deceased account holder. Nevertheless, it is generally accepted that the heirs of the deceased joint account holder may request the bank to inform them about the situation of the account as at the time of death.(15)
The validity of this type of clause is controversial because it can be easily used to circumvent the applicable rules governing the devolution of an estate.
Nevertheless, the Federal Court has confirmed the validity of the so-called clause of exclusion of heirs.(16)
Some scholars object that the clause of exclusion of heirs constitutes a testamentary
provision that must conform to the requirements laid down by Section 505 of
the Civil Code as to how the document must be established (holograph form).
Scholars have also expressed the opinion that the clause should be considered null and void pursuant to Sections 19(2) and 20 of the Swiss Code of Obligations as it may circumvent the rights of the heirs entitled to a compulsory share of the estate.
This trend has been furthered by the Zurich Court of Appeal in a 2001 decision.(17) The court held that the clause of exclusion of heirs was null and void, and that the bank had to inform the heirs not only about the situation prevailing at the time of death, but also about transactions that took place before death.
In 2002 the Swiss Supreme Court upheld a Geneva High Court judgment ordering the freezing of a joint account with an exclusion of heirs clause.(18) The petition had been lodged through protective measures proceedings by the children of the deceased account holder, who were attempting to enforce their rights under Section 598 of the Civil Code (action to recover inheritance). The surviving account holder was the ex-wife of the deceased.
As is the case for a post-mortem power of attorney, a joint account with exclusion of heirs affects only the relations of account holders to banks and has no bearing on the internal relations between account holders themselves, especially where they are the heirs of one of the account holders.
If the reasons for setting up a joint account with exclusion of heirs may be legitimate when the account holders do not want their heirs to interfere in their common business, this scheme may also be viewed as a self-serving tool by which the banks have attempted to avoid their contractual relations with the account holders from being affected by estate issues following the death of an account holder. This may also explain why this type of clause is so commonly found in the banks' general conditions and account opening forms.
It is unclear whether this attempt achieves its goal, as scholars and recent case law have cast serious doubts on the validity of the exclusion of heirs clause and further consider that it does not absolve the bank from informing the heirs about transactions carried out on the account.(19)
Finally, and as is the case for an ordinary joint account, the bank cannot completely ignore the internal relations between the joint account holders. The clause of exclusion of heirs will not immunize the banker against any liability should he or she be aware that the surviving joint account holder is disposing of the funds in a way that is blatantly damaging the heirs' rights.
It may be said that the Swiss system - the power of post-mortem and the joint account with or without the exclusion of heirs clause - is not suitable to organize the devolution of a bank account unless all heirs are in agreement with the set-up implemented by the deceased and his bank.
(3) Maurice Aubert, Le Secret Bancaire
Suisse, Berne, 1995, p 366.
(4) Unpublished decision of the Geneva High Court dated September 10 2003; unpublished decision of the Geneva High Court dated August 7 1997.
(5) Benoit Chappuis, "L'Utilisation de Véhicules Successoraux dans un Contexte International et la Lésion de la Réserve Successorale" in SJ 2005 II, p 37.
(6) Daniel Guggenheim, Les Contrats
Dans La Pratique Bancaire Suisse, 4ème édition, Geneva,
2000, p 438.
(7) Maurice Aubert, "Procuration Encore Valable Après Décès, Mandat Post-Mortem, Donation pour Cause de Mort et Responsabilité de la Banque Après Décès du Client à l'Égard des Héritiers" in SJ 1991, pp 285 to 289.
(12) Luc Thevenoz, "Jurisprudence
Récente Relative aux Opérations Bancaires" in Journée
1995 de Droit Bancaire et Financier, p 158.
(13) ATF 94 II 313/318 = JT 1970 I 46.
(14) Aubert, Le Secret Bancaire Suisse, 1995, p 375.
(15) Guggenheim, p 461; Aubert, "Procuration Encore Valable Après Décès", pp 285 to 294.
(16) ATF 94 II 167 = JT 1969 I 549/552.
(17) ZR 101 (2002) N 26.
(18) Swiss Supreme Court decision of February 12 2002 (5P 17/2002).
(19) Except when the bank has evidence that assets deposited on the account are not to be included in the estate, as is the case when the deceased account holder was holding the assets in a fiduciary capacity or as a trustee (Aubert, "Procuration Encore Valable Après Décès", pp 285 to 294; Aubert, "Responsabilité des Banques Suisses à l'Égard des Héritiers" in RSJ 1992 (1996), pp 137 to 141). Section 4 of the Swiss Banks' Code of Conduct dealing with the opening of account by trusts is important in this respect. The bank is required to know the details of the trust relations, whether by receiving a specific statement to this effect or a copy of the trust deed.
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