New Austrian Supreme Court Decision on Minimum Interest Rate Clauses
For several years, capital market participants have been experiencing the phenomenon of negative reference interest rates, like EURIBOR and LIBOR, which are the basis for interest calculations for many loan agreements. To avoid any potential negative consequences associated with these market conditions (negative interest rates), banks usually try to protect themselves by including clauses on minimum interest rates or interest rate floors within their loan agreements. This is done to guarantee that the creditor can earn, at minimum, the original margin under any prevailing market conditions. One-sided interest rate floors, without corresponding interest rate caps, have repeatedly been invalidated by the courts, if included in the general terms and conditions, contractual forms, or other standard clauses. When used in consumer loan agreements, one sided interest rate floors violate the symmetry requirement included in art 6 para 1 no 5 of the Austrian Consumer Protection Act according to settled case law.
The first decisions on this topic only covered the validity of such clauses as part of consumer contracts and market participants were wondering how interest rate floors would be judged by the courts in a business to business (B2B) setting. An initial Austrian Supreme Court decision from 2016 (case number 3 Ob 47/16g) surprisingly found that a one-sided minimum interest rate agreement was also invalid in a B2B setting but the facts of that case were unique and contained some peculiarities. In June 2018, a decision by the Vienna Commercial Court attracted attention as the Commercial Court basically applied the symmetry requirement on a business loan and ruled that a one-sided interest rate floor was “grossly disadvantageous” pursuant to Art 879 para 3 of the Austrian General Civil Code and was therefore invalid.
Recently, the Supreme Court issued its decision on the above case (case number 1 Ob 75/19i). According to the facts of the case, the initial loan agreement draft had not included an interest rate floor. Only after the borrower requested a change in the security structure did the bank demand a minimum interest rate in return. The change was explicitly accepted by the borrower. This led the Supreme Court to conclude that the minimum interest rate had been individually negotiated and was a primary obligation under the contract. Individually negotiated primary obligations cannot be judged under Art 879 para 3 of the General Civil Code. Therefore, the Supreme Court reversed the decision of the Commercial Court and ruled that the minimum interest rate was valid in this specific case. It follows that minimum interest rates are not invalid in general.
The Supreme Court left open the legal question of whether the interest rate adjustment clause, which was also included in the loan agreement and could have led to a higher interest rate than the agreed minimum being charged, (i) was part of the agreed primary obligation or; (ii) was a secondary condition which must be judged independently from the primary obligation. Therefore, the legal question of the validity of the combination of an interest rate adjustment clause (e.g. EURIBOR + 2 %) with an accompanying reference rate floor of zero (e.g. if EURIBOR is less than zero, it shall be deemed to be zero) has not been settled in Austria. It cannot be ruled out that the floor in this case would be seen as a grossly disadvantageous secondary condition within the meaning of Art 879 para 3 of the General Civil Code. Further case law is needed to increase clarity on this specific legal issue.
In conclusion, case law on B2B transactions is still not clear and it is necessary to analyze the validity of interest rate floors carefully on a case-by-case basis when drafting loan agreements and, when necessary, create the required preconditions for its validity through individual drafting of each loan documentation.
For further information on this topic please do not hesitate to contact us at any time.
Dr. Uwe Rautner, LL.M. (LSE)
T +43 1 361 1361-11
Mag. René Semmelweis, LL.M. (WU)
T +43 1 361 1361-13