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Increased costs provision in lender’s general conditions ruled ineffective by the Finnish Supreme Court
The Finnish Supreme Court has ruled against a well-known Scandinavian bank in a case where the bank, relying on its general terms and conditions, had unilaterally increased the margins on certain long-term loans because the financial crisis had increased the bank’s own costs.
The claimants, certain Finnish municipal entities, had entered into several loan agreements with the bank between 1998 and 2005, with a total principal amount of some EUR 120 million. These floating rate bullet loans had long maturities and margins between 0.018 and 0.15 percentage points.
Pursuant to the general terms and conditions of its commercial loan agreements, the bank had a unilateral right to increase the margin “where such increase is justified because of increased financing costs of the bank not reasonably foreseeable by the bank at the time of entry into the loan agreement up to five percentage points during the term of the loan.”
The question at hand was whether the bank had the right to increase the margins payable by the claimants on the grounds that the bank’s own financing costs had increased because of the financial crisis. The parties agreed that the financial crisis had been “reasonably unforeseeable”. Hence, the question boiled down to the correct interpretation of the “financing costs of the bank” and whether the financing costs had in fact increased in such a manner that the increase of the margins was to be deemed as “justified”, as expressed in the bank’s general terms and conditions.
According to the bank’s submission, it financed its operations from a number of sources, including deposits and long term borrowing. The bank’s costs of obtaining long term financing had increased during the period in question due to the overall increase in its borrowing margins. At the same time, the reference interest rates had experienced a steep overall drop due to the decrease in the European Central Bank’s base rate, which partially mitigated such increase. However, the bank argued that the reference interest rates should not be taken into account in the assessment, because a reference interest rate is, by the nature of the banking business, a pass-through element, affecting equally the lending and borrowing undertaken by banks. The bank also argued that the margin increases had been considerably lower than the increases in its own financing costs.
The Supreme Court opined that the relevant clause in the bank’s general terms and conditions was not clear and should be interpreted in the way that an unexperienced borrower would understand such clause to mean. The clause did not expressly state that the effect of the reference interest rates was irrelevant as claimed by the bank, and hence, the applicants could only have understood that the financing costs were to be assessed as a whole. The Supreme Court further interpreted the “justified” criterion to mean that the increase in the financing costs should be significant and permanent in nature.
The Supreme Court opined that one of the basic principles of floating rate lending is that the borrower bears the risk associated with the fluctuations of the interest rate, and the lender bears the risks related to the costs of its own financing. However, in long-term lending, the conditions may materially change over time, and some adjustment mechanisms may be needed, but those mechanisms should be objective and fair. Where such mechanism is not entirely clear and operates in favour of one party only, as in the case at hand, its application should be limited.
By considering the above factors, the Supreme Court found that the bank had not provided sufficient evidence that its financing costs, as a whole, would have increased in such a manner that could justify a unilateral increase of the margins in the claimants’ loan agreements. The Supreme Court, accordingly, ordered the bank to reimburse the increased interest in full.
The judgment also took into account that the financing of municipal entities is subject to a tender offer process. The Supreme Court stated that the objectives of such process would be undermined if banks were able to bid at competitive interest rates at the outset and subsequently increase those rates by a unilateral notice. Therefore, it remains to be seen whether the reasoning in this judgment would also be applied in the context of a private commercial borrower.
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