Introduction
Variable interest rate clauses in loan agreements are based on a reference interest rate (e.g. EURIBOR or LIBOR) and a mark-up (margin).
When reference interest rates started to fall below zero, the question of whether banks had to pass on negative interest rates to their borrowers when no floor had been agreed became the subject of an ongoing discussion. In particular, the following issues were discussed:
- whether the bank is allowed to establish a “zero floor” (in respect of the reference rate)
- whether and how a negative reference interest rate might affect the agreed margin
- whether a negative reference interest rate may consume the agreed margin and oblige a bank to pay interest to its borrower.
Consumer loans
In previous cases, the Austrian Supreme Court has held that parties to consumer loan agreements regularly agree – and it is therefore a common understanding – that borrowers must pay interest for their loans. A borrower consumer cannot reasonably expect a lender to pay interest on monies advanced. The court has also taken the view in the past that parties agreeing to pay a variable-based interest rate have committed to share the risk of future fluctuations of financing costs.
Following more recent decisions in this context, the Austrian Supreme Court’s conclusions can now be summarised as follows:
- the benefit of negative reference interest rates must be passed on to consumers
- the overall interest rate to be paid by the customer as borrower may drop below the agreed margin and even to zero depending on the development of the reference interest rate; but
- a bank cannot be obliged to pay interest for loans it has granted due to a negative reference interest rate.
Corporate lending
The same principles do not apply to the corporate lending sector.
In B2B transactions, the court assumes that there is less need for the protection of contractual parties. The general presumption is that a corporate borrower has broader experience, greater knowledge and a deeper understanding of lending arrangements. Besides this, the following principles apply to corporate lending:
- Remuneration - If not explicitly agreed otherwise, it is assumed in B2B transactions (following a general principle of Austrian law) that a reasonable remuneration is owed by the receiving party (i.e. the borrower).
- Adaption balance (Anpassungssymmetrie) - Borrowers' counsel in consumer lending cases have argued that the courts should not imply a zero floor reference rate to lending arrangements where the parties have not also agreed to a cap (the so-called “adaptation balance” argument). The Supreme Court has now commented on the application of this borrower line of attack in relation to B2B loans.
The Court has taken the view that the "adaptation balance" principle will only apply in exceptional cases to corporate lending business.
Conclusion
While the recent decisions of the Austrian Supreme Court are depending on the facts of a particular case, these rulings provide for a rough guide on how a zero floor may introduced by banks into consumer loan terms.
Except for isolated examples, banks (for now) are abstaining from the introduction of a zero floor in consumer loans, not least to avoid negative PR.
As far as corporate lending is concerned, only isolated cases have so far been decided on by the Supreme Court. Nevertheless, in general, a zero floor is more likely to be upheld by the Court in the context of a corporate loan.
