In the past, interest escalation clauses in loan agreements in Austria commonly had variable interest rates, based on a reference interest rate such as EURIBOR or LIBOR and an appropriate interest mark-up. When reference interest rates started to fall below zero, the question whether banks had to pass on negative interest rates to their borrowers in case of loan agreements where no floor had been set became the subject of great discussion. In addition, loan agreements in which a “zero floor” for reference interest rates had been implemented were contested as well.
Decisions on Consumer Loan Agreements
The fundamental question of whether negative reference interest rates which consume the agreed margin may lead to the bank’s obligation to pay interest to the borrower was decided first. The Austrian Supreme Court concluded that it is the common understanding of parties to consumer loan agreements that it is the borrower’s – and not the lender’s – obligation to pay interest on a loan. This applies all the more to B2B transactions, where it is generally assumed that a reasonable remuneration is owed by the receiving party (i.e., the borrower), if not explicitly agreed otherwise. A borrower therefore cannot expect the bank to pay interest on a loan where the margin is consumed by a negative reference interest rate.
The uncertainty with respect to negative interest rates on consumer loans appears to be resolved. The Austrian Supreme Court dismissed the argument of a “contractual gap” and confirmed the application of negative reference interest rates in consumer loan agreements without a “zero floor” for reference interest rates. Against that background, banks have argued they are entitled to increase their margin (inversely proportional to the negative reference rate) in accordance with (general) interest rate adjustment clauses. Based on the so-called “adaptation balance” (Anpassungssymmetrie), a principle embedded in the Austrian Consumer Protection Act, the Austrian Supreme Court concluded that the subsequent introduction of a “zero floor” for reference interest rates is not permissible, where an upward trend in the reference interest rates has not been capped. The same principle applies in case of an initially agreed “zero floor” for reference interest rates. Even where such a cap applies (either from the outset or based on a subsequent amendment), it will be subject to review as regards its appropriateness relative to the “zero floor” in order to be effective.
Uncertainty for Corporate Loan Agreements
As the conclusions of the Austrian Supreme Court with respect to consumer loans cannot be directly applied to B2B transactions, the legal situation remains unclear for the corporate lending business. The Austrian Supreme Court has contributed to this uncertainty by confirming the application of the “adaptation balance” in (isolated) corporate lending cases. Until a recent (contested) decision of the Vienna Commercial Court, neither the ongoing discussion nor existing case law provided a systematic analysis of the problem, but instead both acted on a case-by-case basis. Despite the overall uncertainty, it seems clear that no “contractual gap” can exist where no specific “zero floor” provision was agreed on. Taking into account a general statutory safeguard against improper advantages for a party to a contract (also applicable to B2B transactions), general interest rate adjustment clauses are only valid if they also oblige the lender to decrease the interest rate under certain circumstances. Even where a general interest rate adjustment clause exists, lenders will not necessarily be entitled to adapt their margins (as a function of the development of interest rates) but will have to provide evidence that the understanding of the parties was that the general clause would apply in times of negative reference interest rates. Even then lenders will presumably not be entitled to adapt their margin on a regular basis based on the current development of negative reference interest rates. Finally, the Vienna Commercial Court concluded in its controversial decision concerning an initially agreed-upon “zero floor” that the implementation of a “zero floor” without a cap could also be grossly disadvantageous and therefore void.
Based on recent court decisions it seems that corporate lenders will be treated similarly – but not identically – to consumers. While the subsequent introduction or initial implementation of a “zero floor” without a respective cap may well be considered void for both, deviating results may be expected where the contractual arrangement is considered inadequate for consumers based on the “adaptation balance,” but not grossly disadvantageous from a corporate perspective.
By Philip Hoflehner, Partner, and Allan Hahn, Senior Associate, Taylor Wessing Austria
This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
