The Supreme Court will consider a common clause in commercial loan agreements that allowed Bank of Ireland to raise interest rates in line with its increased lending costs in the wake of the financial crash.
In deciding the case is of significant public importance, a panel of three Supreme Court judges noted the interest variation clause had a “serious impact on borrowing and on the margins of commercial customers”.
Given this is a “standard” term, the judges said, it was important to construe whether there are limits to what a bank can do based on the wording of a contract, or whether a “carte blanche” approach is agreed between customer and lender.
The issues arise in a case brought by four business partners who together borrowed €15 million in 2009 to develop an industrial premises in Rathcoole, Co Dublin. They have since fully repaid the loan and all interest calculated by the bank. They claim they would have paid €738,000 less if the interest rate calculation had not been altered, in alleged breach of contract.
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The loan offer advanced was subject to a clause permitting the bank to change the interest rate and its method for calculating interest “from time to time at the bank’s absolute discretion, whether to take account of a change in prevailing market conventions in Ireland or otherwise”.
In October 2011, Bank of Ireland invoked this clause, informing the four business partners that it was changing its interest calculation method from one that tracks the Euro Interbank Offered Rate (Eurobor) – which is the average interest rate at which European banks lend to each other – to one based on the bank’s “cost of funds”.
The bank told them it had since 2007 experienced a “significant increase in its funding costs, driven by prevailing market conditions which were outside of our control”. It said it was paying a premium over publicly quoted interest reference rates to fund lending, so would be changing its calculation.
The borrowers strongly contested that the lender was allowed to change the reference rate from the industry standard Euribor to what they claim was a “bespoke” bank reference created “to serve its own interests”.
Dismissing the plaintiffs’ case and appeal, the High Court and Court of Appeal found the bank was entitled to change its method of calculation. The High Court said the bank had “absolute discretion” to alter the method, if giving the borrowers one month’s notice.
The borrowers claim the courts were wrong in their interpretation of the loan contract, which they say affects some 8,000 customers. They claim it could not have been contemplated by rational business people that such a “dramatic alteration” to interest rates could occur.
The bank says the case is not generally important and the contract allows for this large variation in interest-rate calculation.
Supreme Court judges Peter Charleton, Iseult O’Malley and Gerard Hogan said the clause affected “many more customers” than the plaintiffs. The threshold for an appeal to the highest court was met.
A date for the appeal has not yet been set.
