Germany: Deutsche Bank Liable In Misselling Suit About Spread Ladder Swaps - Misselling Liability In Germany And England


The financial crisis and ensuing losses suffered by counterparties to various structured product transactions has provoked an outbreak of "misselling" cases. A number of cases have been heard by the English Courts but proceedings have also been brought in jurisdictions across Europe, including Germany. This alert looks at the outcome of cases in Germany and England and the lessons that can be learnt from the differing trends in these jurisdictions.

Germany - An overview

It is a long-standing principle under German law that a bank, when approached by a customer about investment advice and when giving such advice, will be deemed to enter into a separate contract for advisory services with such customer. As a result, the bank is obliged to inform the customer of all facts material to the customer's investment decision. Whether a bank has reached the required degree of disclosure will depend upon the facts of the case and the complexities of the underlying product. This article discusses one in a long line of actions brought against Deutsche Bank by various midsize corporates and municipalities in connection with spread ladder swaps entered into with Deutsche Bank.

England - An overview

Cases before the English Courts have examined the construction of contractual documentation, common law duties and the regulatory overlay, under the Financial Services and Markets Act 2000 ("FSMA"). It is worth bearing in mind that regulatory action can often open the floodgates to civil claims and financial exposure to clients may be more likely to crystallize in the context of a settlement with the regulator.

The leading case in this area is the case of JP Morgan Bank v Springwell Navigation Corp in which the Court held that under the terms of its contract the bank was not under any duty of care to advise its client as to the suitability and appropriateness of investments and that no misrepresentation claim could be made. Thus, under English law it is in principle possible to construct a purely execution only style relationship and for financial institutions not to accept obligations to advise or ensure suitability.

The English Court has tended to take a stricter line that enshrines the principle of freedom to contract and for parties to strike a bargain (subject to mandatory regulatory protections) as to the scope of responsibilities of the financial institution.

Germany – Recent Decision on Misselling involving Deutsche Bank

In a decision handed down on 22 March 2011, the German Supreme Court (Bundesgerichtshof – the "Court") held Germany's largest bank, Deutsche Bank (the "Bank"), liable for misselling. The Court awarded some EUR 540,000 in damages against the Bank in an action brought by a German manufacturer Ille Papier-Service GmbH ("Ille"). The Court found that the Bank had failed to adequately advise Ille of the risks associated with a financial product, a so-called "CMS spread ladder swap", which the Bank had recommended. The Bank had, in particular, not disclosed to Ille that at the date of trading, the swap had a negative market value of EUR 80,000 for Ille. The decision has been long-awaited, both because it provides important guidance on the scope of disclosure duties of banks vis-ŕ-vis their customers under German law and because it is only the first in a long line of actions brought against the Bank by various mid-size corporates and municipalities in connection with spread ladder swaps of this specific type to reach the Court.

The decision imposes strict duties of disclosure and advice on banks doing business in Germany.

The Court found that, in 2005, the Bank proposed that Ille enter into an interest swap transaction with the Bank governed by a German law master agreement, the Rahmenvertrag. The standard Rahmenvertrag does not contain a Non Reliance provision equivalent to the 2002 ISDA Master Agreement's optional provision however no reference is made to any form of non reliance provision in this preliminary press release of the case. Under this swap, the Bank had to make semi-annual interest payments at 3 percent on a reference amount of EUR 2 million., i.e. EUR 60,000 every six months, for a period of five years. At the same intervals, Ille was to make payments based on a fixed interest rate of 1.5 percent on the same reference amount; after the first year, Ille's payments were computed on the basis of a floating interest rate. This floating interest rate was calculated on the spread between the 10- and 2-years swap rates on EURIBOR basis, called "CMS 10" and "CMS 2", respectively. The formula used for the floating rate was "interest rate of previous period + 3 x [strike – (CMS 10 – CMS 2)]"; the "strike" was fixed at 1.0 percent, but would decrease over time to 0.85, 0.7 and ultimately to 0.55 percent and the floating rate could not go below zero. When meeting with Ille, the Bank had warned Ille that there could be a situation where the spread decreased so much as to result in Ille having to make payments rather than receiving any. The Bank also advised Ille that Ille's loss exposure was "in theory without limit". At the time of trading, the swap had a negative market value of about 4 percent of the reference amount, i.e. about EUR 80,000. The Bank had structured the swap in such a way in order to hedge its own risk exposure in the market. However, the Bank did not disclose this fact to Ille.

It is a long-standing principle under German law that a bank, when approached by a customer about investment advice and when giving such advice, will be deemed to enter into a separate contract for advisory services with such customer. As a result, the bank is obliged to inform the customer of all facts material to the customer's investment decision. This obligation will increase with the degree of complexity of the financial product. More specifically, the bank has to inform the customer of the risk exposure in clear terms. Where this risk exposure may lead to materially adverse consequences for the customer, this needs to be communicated clearly. The risks must not be downplayed or described in a vague fashion. In essence, the customer has to be put in a position where his understanding of the risks associated with the financial product is the same as that of the bank.

In its decision, the Court made clear that CMS spread ladder swaps are highly complex and risk laden products which require the bank to provide the highest degree of advice, even where – as in the present case – the customer is being represented in the negotiations by a person holding a business degree. However, the Court did not say whether the Bank's risk disclosure had met these standards, or whether the Bank met the standards sufficiently when it described Ille's risk exposure as "in theory without limit". Instead, the Court based its decision on the fact that the Bank had violated its duties under the separate deemed advisory contract with Ille when it did not reveal to Ille that the swap had been designed to have a negative initial market value of EUR 80,000. The Court made sure to add that this does not mean that banks have to inform their customers that they seek to make profits when they recommend their own products; the Court conceded that this motive was obvious and did not require any disclosure vis-ŕ-vis the customer. That said, the Court found that the situation is different where a bank wilfully engineers the odds of a product to run against the customer for the purpose of being able to hedge its own risk, as the Bank was found to have done in this instance due to the initial negative market value of the trade. Because the Bank had not disclosed this fact, Ille had a right to effectively rescind the contract and to claim back any payments made under the swap.

The full reasoning of the Court is not available yet. However, a few significant ramifications can already be identified.

  • Where a bank sells to its customer a product such that the interests of the bank and the customer run contrary to each other – as in the case of this swap –, and where the bank has structured the product so as to work in its favour, the bank must disclose the relevant factors to the customer. In particular in spread ladder swaps like the one in this case, the bank must disclose any negative initial market value which it may have worked into the swap.
  • Products such as spread ladder swaps or other highly complex derivative instruments will require a bank to comply with very high standards of advice and disclosure. Indeed, the Court requires banks to in essence put customers in a position where they understand the risks associated with the product as well as the banks themselves do.
  • The fact alone that the customer's representative holds a business degree will not per se relieve a bank of determining whether the customer actually understands the particular product on offer. Rather, the bank must ascertain in each individual case if the customer understands the risks.
  • Banks are under no general obligation to disclose the profits which they make when they sell their own products.

With this decision, the Court has provided some significant clarification of the scope of the German law advisory and disclosure duties applicable to banks when providing their customers with financial products proposals. While these are strict, it does not follow from this latest decision that spread ladder swaps, or derivatives products in general, cannot be sold in Germany. It is also not the case that banks must be continually wary of being sued for misselling in all cases. While some commentators have argued that this is in fact the case, the findings of the Court are based on a very specific set of facts. Most importantly, the key element – i.e. the negative initial market value – will not be found in every swap, let alone every financial product. In addition, whether the customer can rely on the argument of misselling will always depend on the factual circumstances of each individual case, including the information made available to the customer and the specific knowledge that the customer, or its representatives, have about the product in question. When sued for misselling, it will therefore always pay off to first carefully scrutinize the underlying facts.

The English

Under English law, the key issue is what duties the financial institution has agreed to accept under its contract or terms of business with its client and how it has characterised its client. A firm may categorise its client as an advisory, discretionary management or execution only client. The duties that the firm owes to its client, both from a regulatory and common law perspective, will depend on this categorisation. The client's degree of sophistication and categorisation for regulatory purposes are further considerations in assessing the duties owed to the client.

The precise legal basis of claims brought by clients will of course vary according to the particular facts. Recent claims have, however, tended to involve allegations of breach of contractual duty of care, the implying of terms into the contract with the firm and misrepresentation. In some cases where a relationship has been set up as an execution only relationship, clients have subsequently sought to contend that the firm assumed a duty to advise based on the conduct of the personnel within the firm who in fact provided advice to the client and thereby assumed a duty to advise.

The JP Morgan Bank v Springwell Navigation Corp case illustrates the approach taken by investors seeking damages for negligent advice. The investors in the Springwell case were successful businessmen categorised as sophisticated nonprivate investors for the purposes of their relationship with JP Morgan. These individuals, acting through a company, invested in a portfolio of debt instruments linked to reference bonds issued by the Russian Federation. When Russia defaulted on certain of its financial obligations in 1998, the value of the portfolio collapsed. The claimant argued that JP Morgan was in breach of its duty of care to advise it on which investments were appropriate, that JP Morgan was prevented from relying on certain disclaimers contained in the contractual documentation and finally that JP Morgan was liable for negligent misstatement.

The investors' claim failed, the Court holding that JP Morgan owed the claimant no duty of care to advise it as to appropriate investments and that the relevant contractual terms prevented any representations being made, obviating the misrepresentation claim. Of crucial importance was the absence of an advisory duty of care arising from the contractual documentation and the fact that the classification of the claimant as a sophisticated non-private investor was a precondition to its participation in the relevant investments. The contractual documentation showed that the parties specifically contracted upon the basis of a trading and banking relationship which negated any possibility of a general or specific advisory duty.

More recently these types of issues have been considered by the English Court in the case of Titan Steel Wheels Ltd v Royal Bank of Scotland. The client in this case claimed that RBS had, in breach of its duty, advised the client to purchase derivatives products which were unsuitable for the client. The terms of business stated that RBS did not act as the client's advisor and that it provided an executiononly service. The Court upheld the contract, ruling that RBS acted on an executiononly basis and effectively excluded any duty to the client to advise it as to the merits of the derivatives products in question.

Product documentation will include disclaimers of liability so that the issuer of the documentation will exclude liability for the accuracy of the information contained in the documentation. Disclaimers may be effective in excluding liability, although where fraud is proved they are unlikely to be enforceable. The effectiveness of a disclaimer was upheld in the case of IFE Funds SA v Goldman Sachs International.

The most recent case in this area is the case of Cassa di Risparmio della Repubblica di San Marino v Barclays Bank Ltd (9 March 2011) in which the Claimant alleged that Barclays had induced it to purchase certain structured notes, and subsequently to agree to a restructuring of the notes due to representations made to it that were fraudulent or which Barclays had no reasonable grounds to believe were true. Reinforcing the trends in earlier cases the Court found in favour of Barclays and against its client. The Court's reasoning was based partly on findings of fact, against the Claimant's allegations that certain misrepresentations had been made but also on legal grounds as to whether, for example, statements made in relation to default risk could be found to be the basis of a misrepresentation claim at all.

While the Deutsche Bank case may be regarded as being made on particular facts, the high standards expected of banks by German Courts may be contrasted with the position in England where the Courts have tended to take a strict line and hold banks responsible only in respect of what they have expressly committed to the clients to do.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.