Update: Loan markets upside down – are banks to pay interest on loans?
4 March 2022
In a nutshell: In another ruling on negative interest rates, the High Court Düsseldorf rejected a claim for payment of negative interest rates with interesting considerations. It should be noted that the court primarily focuses on the circumstances of the transaction and the market situation at the time of the conclusion of the loan agreement, in which negative interest rates were hardly conceivable. Therefore, parties are well advised to continue to pay attention to the wording of the relevant clauses when drafting and negotiating loan agreements under German law until possibly a German Supreme Court decision brings clarity.
Last October, we reported on the latest case regarding negative prime interest rates (Newsletter October 2021). The ruling of the Düsseldorf District Court of June 2020 (2b O 254/18) described in that newsletter has now been confirmed in the next instance by the Düsseldorf High Court in October 2021 (5 U 29/21) with interesting implications.
The Düsseldorf High Court rejected the claim for payment of negative interest, stating that the parties had mutually assumed at the time of conclusion of the contract that interest was to be paid only by the borrower and that in a worst case scenario for the lender this interest payment obligation could merely be reduced to nil in the event of a corresponding developments of the interest rate.
This view is now followed by the Düsseldorf High Court in its decision. The court argues that the contract is to be interpreted to the effect that a further payment obligation on the part of the lender – in addition to the transfer of capital – was to be excluded by implication. In the contract, the parties had agreed in the clause concerned that “the loan […] shall bear interest annually”. Based on the etymology as well as the historical understanding of the word “interest”, the interest debtor has to make a payment to the interest creditor, according to the Düsseldorf High Court. Conversely, this means that the interest creditor receives something from the interest debtor on the basis of the interest payment obligation. This is also in line with the provision of Section 488 (1) sentence 2 German Civil Code: the borrower is obliged to pay interest to the lender. A payment obligation of the lender to the borrower, on the other hand, is not provided for in the statutory model of the loan agreement.
The Düsseldorf High Court also concedes that this interpretation of the interest clause is not the only possible interpretation of the contract. However, the interest clause as well as the underlying promissory note agreement were prepared by the borrower and indisputably qualified as general terms and conditions. Based on the ambiguity rule of Section 305c (2) of the German Civil Code, pursuant to which any ambiguity is to the detriment of the user of general terms and conditions, the interpretation of the interest clause that is more favourable to the lender is decisive for the court ruling according to the reasons given by the Düsseldorf High Court.
The Court further states that the interpretation of a contractual clause must also take into consideration the time of its inclusion. In the Court’s view, the parties applied the term “loan agreement” in its legal meaning in 2004, and the subsequent developments regarding negative interest rates were not foreseeable by anyone at that time.
Based on the interpretation of the interest adjustment clause – particularly in light of the time at which the agreement was concluded – a claim to payment of the negative interest must therefore be denied.
The appeal of the decision of the Düsseldorf High Court is currently still pending before the Federal Supreme Court.
Against the backdrop of the pending Supreme Court decision and the explicit reference to the circumstances at the time the loan agreement was concluded, as well as the special nature of the case presented, namely that the loan conditions were stipulated by the borrower, we believe that it is still advisable for the parties to a loan agreement to draft their agreements in such a way that they explicitly contain a provision for the possibility of a negative prime rate.
“Zero floor” clauses have been included in many loan agreements in recent years, whereby the parties have agreed to a “zero floor” for the prime rate or a minimum interest rate.
This practice should be maintained in all new loan agreements to be entered into. Alternatively, the parties should expressly provide in the loan agreement for the reverse “interest flow” as consideration for the deposit of principal with the borrower, if so desired.