The Gordian Knot of Business Loans and Abusive Interest Rate Clauses - Recent Developments through Greek and European Case Law

Legal Insight

September 2022

George Psarakis LL.M. (mult.), PgCert

(republished from naftemporiki.gr)

Summary: One of the biggest problems facing businesses today is the ballooning of their debt to credit institutions. Much of this problem stems from the increase or maintenance of unchanged lending rates of credit institutions in the decade 2009-2018. This article analyzes the problem in relation to the illegal and abusive practice of banks to vary lending rates based on vague and unverifiable criteria.

One of the biggest problems facing businesses today is the swelling of their debt to credit institutions and, now, Funds. Much of this problem stems from the increase or maintenance of unchanged lending rates by credit institutions over the decade 2009-2018. Although the benchmark interest rates (ECB, EURIBOR) have been continuously decreasing since the end of 2008, banks' business lending rates have followed a stable path in some cases and even a reverse path in others. This has naturally resulted in companies being asked today to settle amounts that are disproportionate to their actual borrowing costs and in any case contrary to banking supervisory law and consumer protection law. In particular:

1. According to a relevant decision of the Bank of Greece in 2004 (Banking and Credit Committee 178/19-7-2004), all credit institutions should apply to variable rate loans, including business loans, interest rate indicators of a broadly applicable nature and in relation to the banks' funding needs, such as the ECB's intervention rates, Euribor, bond yields, short-term securities, etc. These indicators can be set as a base rate on which it is possible to agree any margin the parties wish. Therefore, if a business loan was granted at a variable interest rate of Euribor3m + 3% margin, for example, the borrower would be able to check the current interest rate of his contract every day by himself by simply consulting a financial newspaper or the internet to find out the Euribor3m and then adding the 3% margin. The credit institutions, however, overwhelmingly ignored this mandatory decision by the Bank of Greece and continued to apply their own interest rate as the base rate for the variable rate. Other banks called it the 'basic lending rate', others the 'basic lending rate' and so on. The logic was as follows: each bank periodically set its own base rate, at its own unaudited discretion, on the basis of which the variable interest rate on all its business loans was changed. By increasing the base rate by, for example, 0,5 %, the bank could increase its income by millions of euros by automatically linking its own base rate to all the floating-rate business loans granted. However, even if the base rate was, for example, the ECB's base rate, they sometimes included in the contract the phrase 'entitled to adjust', which automatically meant that even if the base rate was reduced, the credit institution could leave the contractual interest rates unchanged, since it was at its discretion to change them or not (see the Commission's report on the ECB's base rate in the case of the ECB). recently, e.g. the recent decision of the Athens Court of Appeal, No 3979/2021: "Furthermore, according to the aforementioned terms, the bank 'had the possibility' and not the obligation, to unilaterally adjust the interest rate in case market conditions favoured it or when the ECB's intervention rate increased, but also to keep it constant in case of a decrease, thus disproving the plaintiff's reasonable expectations of a decrease in the interest rate in this case..."). 

2. Of course, one could argue that in a free economy, once the parties have agreed on the specific interest rate, the borrower cannot subsequently "take back his signature". The problem, however, does not lie in the initial agreement, which indeed cannot be checked in a free economy, where the borrower is able to compare and choose the bank that provides the lowest lending rate; the problem arises after the contract is concluded and throughout the life of the loan. The bank, while now tied to its borrower-customer, can unilaterally increase its base rate and thus the interest rate on all its variable-rate loans. 

3. Another objection would be that the banks changed their base lending rates on the basis of the cost of money and market conditions, as was also stipulated in the loan agreements (the agreements also mentioned other factors such as, for example, inflation fluctuations, general and specific credit risk, conditions of competition between credit institutions, etc.). The crisis and the problems faced by our country and our credit system have increased the cost of borrowing, which should therefore be passed on to borrowers. However, none of the factors mentioned in the contracts were quantifiable so that the borrower would know at any time the interest rate of his contract. There are credit institutions where the abuse of these contractual terms is blatant: in parallel with the rapid fall in ECB interest rates, they increased their own base rates or reduced the base rates but increased the margin in return. For example, a particular credit institution at a final Euribor3m + 2% in 2010, due to a reduction in the base rate in the following years, increased the margin by 3%, with the result that the final floating rate remained almost unchanged.

4. Everything we mention here is known to the credit institutions and indeed sanctions have been imposed by the Bank of Greece which have been confirmed by the Council of State. By way of example, we refer to the decision 2857/2015 of the Council of State which ruled on the legality of a relevant fine for a variable interest rate clause which was used by a systemic credit institution in its contracts and which linked the interest rate to the cost of money, the fluctuation of inflation, the general and specific credit risk, etc. The relevant clause was therefore considered unlawful because it provided for vague and general criteria in the loan agreement as factors affecting the change in the interest rate which the average trader could not understand and calculate. 

5. Moreover, we conclude that this practice is illegal, taking into account the law of consumer protection. Since it has already been ruled by the Plenary of the Supreme Court (decision 13/2015) that the borrower company is also a consumer, we can easily apply this law also in cases of granting business loans (the law may have been amended for the worse in 2018, but the new concept of "consumer", which may include fewer companies based on specific criteria, applies to contracts concluded after 17/3/2018 and therefore to the minority of problem loans). Greek and EU legislation prohibits the use of interest rate clauses that are not transparent and whose fluctuation cannot be easily controlled by the borrower. And, of course, a bank base rate which varies according to vague criteria such as 'the cost of money' or 'market and competitive conditions' cannot be said to be easily controllable by the borrower. On this issue, we have dozens of decisions of Greek courts, as well as recommendations from the Consumer Ombudsman, which accept these claims. (see e.g. See, for example, the judgment of the CJEU Marc Gomez C-128/18: "Particularly decisive for the assessment which the national court must make in that regard is, first, the fact that the main data relating to the calculation of that interest rate are easily accessible to anyone intending to take out a mortgage loan by means of the publication of the method of calculating that rate and, second, the provision of information on the past development of the index on the basis of which that rate is calculated". ).

6. The big question that immediately comes to the reader's mind is this: assuming we accept the illegality of this particular floating rate agreement, what will be the result? Here opinions vary. A first view accepts that the original agreed interest rate should be recalculated on the basis of the fluctuations in the ECB's intervention rate, which is considered to be an objective rate for measuring the cost of borrowing for credit institutions. Another view is that the court seised should invite the parties to renegotiate the missing clause (see judgment of the CJEU BANCA - C 269/2019 and judgment of the Athens Court of Appeal No 3979/2021). A third view wants the loan to become interest-free, with the result that the credit institution must repay the interest paid up to that point (see e.g. the case of recognition of the invalidity of the default interest rate in judgments C-96/16 and C-94/17 of the CJEU). A final view wants the contract to be entirely void, with the result that only the amount borrowed without interest is due.

7. The basis of this latter, and more radical view, is the idea that there can be no loan contract without an interest rate clause if the latter is found to be invalid. As the Athens Court of Appeal recently ruled in a relevant decision, '... the defendant - the bank - would not have attempted these transactions without the abusive and invalid terms, but would have relied on them as a single, indivisible whole. Thus, the recognition of the invalidity of the agreed method of fixing the variable interest rate as abusive makes it impossible, in accordance with the law of contracts, to continue their validity without the abusive terms'. Only exceptionally may the national court give a supplementary interpretation of the contract and rescue it after finding that an essential term is invalid and, in particular, where cancellation of the contract would expose the consumer to particularly harmful consequences (see Marc Gómez, C-125/18 and Dunai, C-118/17). Obviously, however, the consumer is not exposed to 'particularly onerous consequences' where the loan agreement in question has already been terminated, with the result that the debtor-consumer is liable, in any event, for the entire loan, i.e. both the principal and the interest. In this case, recognition of the invalidity of the contract would put the consumer in a more favourable position, since, in this case, the supplier is now protected exclusively, in the absence of a valid contract, under the provisions on unjust enrichment and, in particular, only for the repayment of the capital paid, excluding interest (see, in particular, the provisions on unjust enrichment). See also the recent judgments of the CJEU in Joined Cases C-80/21 to C-82/21 D.B.P. and Others, where it was held that Directive 93/13/EEC does not permit the application of national case-law whereby a national court, having found that an unfair term in a consumer contract is invalid which renders the contract as a whole invalid, may replace the invalidated contractual term with a national provision of secondary law, despite the fact that the consumer opposes that choice). 

8. Also, in support of the above, there is the following reasoning: if the only sanction foreseen for credit institutions that violate the above legal framework is the application of the ECB's interest rate fluctuations, which they were obliged to apply from the outset anyway (they would primarily apply ECB or Euribor indices), which credit institution, as a rational financial undertaking, would decide not to violate the law? Since even in cases where the borrower would take legal action (rarely), the result would be to apply what should have been applied from the outset (Banco Español de Crédito judgment, European Court of Justice).  see also in this respect Case C-269/19, Banca B SA: "Such a discretion would contribute to annihilating the deterrent effect on professionals of completely excluding the application of such unfair terms vis-à-vis consumers, in so far as professionals would continue to be tempted to use such terms, knowing that, even if they were declared invalid, the contract could nevertheless be supplemented, to the extent necessary, by the national court in order to safeguard the interests of the professionals concerned...").

9. The Greek courts so far apply the first solution and adjust the interest rates based on the changes in the ECB's intervention rate, thus downwards (see, for example, decision 3979/2021 of the Athens Trial Court of Appeal where the court declared the clause invalid and applied in its place the ECB's base rate plus the agreed margin; see also decision 105/2019 of the Supreme Court: "The filling of the resulting gap is cured by applying the provisions of Article 371 of the CC and the concept of 'fair judgment', which governs that article, with the aim of fairly restoring the contractual balance of rights and obligations"; and several judgments contain the following reasoning: "A reasonable criterion, which reflects the conditions of the financial market and expresses in the most valid manner the will of the parties to link the variation in the interest rate of the contract to the current changes in the cost of money on the market, is the interest rate of the European Central Bank's main refinancing operations, which is the rate at which it grants loans to credit institutions..."). This calculation, however, again results in a great advantage for the borrower, bearing in mind that, on the one hand, this adjustment is made over a period of several years and, on the other hand, that business loans involve large amounts of borrowing and therefore high interest rates. However, this view of the Greek courts is incorrect, since it is based on provisions of a general nature (Articles 371, 200 and 288 of the Civil Code), the application of which, according to the case-law of the Court of Justice of the European Union, is not permitted to fill the gap in the contract. (As the Court of Justice held in Dziubak (C 260/18 - para. 61-62): "In the light of the foregoing, the answer to the first question must be that Article 6(1) of Directive 93/13 must be interpreted as precluding the filling in of contractual gaps caused by the deletion of unfair terms contained in a contract solely on the basis of national provisions of a general nature which provide that the legal effects of a legal transaction are to be supplemented, in particular, by the legal effects flowing from the principle of fairness or customary usage and which are not provisions of an internal nature. and Profi Credit Bulgaria EOOD C-170/21: 'In that context, the Court has also held that that provision is contrary to a rule of national law which allows the national court to supplement the contract in question by revising the content of a clause which it has found to be unfair (see judgment of 26 March 2019, Abanca Corporación Bancaria and Bankia, C-70/17 and C-179/17, EU:C:2019:250, paragraph 53 and the case-law cited)').

10. Finally, it should be said that since in many cases the credit institutions (or now the Servicers) in every arrangement with the borrowers require the acknowledgement of the debt and the waiver of any objections by the debtor, it should be noted that the latter is valid only under strict conditions. As stated by the Court of Justice of the European Union in Bank BPH C-19/20: "By analogy, the consumer may waive the right to invoke the unfairness of a clause in a debt renewal contract by which the consumer waives the effects which would result from the declaration that such a clause is unfair, provided that that waiver is the result of free and informed consent (judgment of 9 July 2020, Ibercaja Banco, C-452/18, EU: C:2020:536, paragraph 28)'.