Securities Portfolio, an Incorrectly Executed Stock-Market Order and Bank Fault: How to Compensate the Client?

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The case: a sell order the bank did not execute

A private-banking investor, who had concluded an execution-only agreement (mere order execution, no investment advice or discretionary management) with a bank, complained that it had not executed his instructions to sell subscription rights he held. The bank considered such an order exceeded the agreement’s limits and was insufficiently precise, and did not execute it. The court held that the bank had committed a fault by not drawing its client’s attention, on receiving the order, to the fact that it manifestly fell outside the agreement and so could not be executed.

How to compensate the investor for that fault?

The investor argued that the bank’s fault had caused a loss equal to the difference between the average price of EUR 11 per security (the price during the first four trading days) and the unit price of EUR 4.60 finally obtained when he was able to sell. The bank replied that, even if it had warned the client that the order was imprecise, he would not have been able to give a more precise one and thus to sell.

Loss and the loss of a chance in financial law

The Court of Cassation treats loss as harm to an interest or the loss of any advantage, provided it is stable and legitimate. A loss is certain where it is not merely hypothetical or conjectural; it need not be certain in extent, but in principle. The loss of a chance is the disappearance of the possibility of a favourable event (a rise in price) or of avoiding an unfavourable one (a fall). This theory allows a victim to be compensated where an uncertainty affects obtaining a benefit or avoiding a loss, provided the chances were serious. The Court of Cassation has recognised the broad conception: a real chance is taken into account for compensation if the fault is the condition sine qua non of its loss.

The court’s reasoning: the probability the investor would have acted differently

The court held it indisputable that, had the bank refused to execute the order, the client would have taken other steps. By failing to refuse execution as it should have, the bank certainly prevented its client from acting. As to valuing the loss, however, this did not establish that the client would necessarily have sold at EUR 11. The court found it highly probable that the client, an experienced investor who followed the situation day by day, would have reacted when the price of the subscription rights suddenly fell from EUR 12 to EUR 9.40.

The question was then the chances that the client, kept informed and free to make the best strategic choices, would have decided to sell at a more favourable price than that actually obtained. The court held there was a strong probability, which it assessed at 85%, that the client would have sold during the fifth trading day, at EUR 9.40. It therefore found a causal link between the bank’s fault and a loss of (85% x EUR 9.40 x 9,000 securities) minus the EUR 41,164.02 obtained, that is EUR 30,745.98.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.