knowledge 2 June 2021 |

Court Considers Impact of EURIBOR Reference in Variable Rate Loan Agreement

The Dispute

In Start Mortgages DAC v Keating¹, the borrowers had appealed an order of possession granted by the Circuit Court in relation to a loan and related mortgage secured on their family home. The lender sought summary disposal of the appeal while the borrowers argued that the matter should be remitted to plenary hearing given a dispute between the parties over the interest rate applicable to the loan.

The borrowers argued that the lender had incorrectly calculated the rate of interest payable under the loan agreement and that, on a proper interpretation, they would never have been in arrears under the loan agreement.

The most pertinent of the disputed clauses of the loan agreement reads:

“CONDITION 402 – VARIABLE RATE

The rate of interest applicable to this loan will vary in line with market interest rates. It will be directly affected by the rise and fall of the Euro Interbank Offer Rate.”

Meaning of the Clause

The borrowers put forward two arguments:

• the correct interpretation of special condition 402 is that interest payable under the loan agreement would fluctuate directly in line with changes in EURIBOR.  The borrowers alleged that they have evidence that this has been confirmed by a named official of the lender in a phone conversation;

• even if the above interpretation is not accepted, the lender must, at the very least, calculate the applicable interest rate by reference to EURIBOR.  The borrowers alleged that the lender had instead being calculating interest by reference to its cost of funds.

The lender counter-argued that:

• it had retained discretion to vary the interest charged and that it had not committed to providing a fixed rate above EURIBOR;

• the clause specifically states that interest would vary in line with market rates, and EURIBOR simply represents one factor in the calculation of the relevant rate.  The lender had not agreed an obligation to reduce the interest rate in line with EURIBOR;

• in addition, the lender had no obligation to disclose its funding arrangements, which should be considered commercially sensitive information.

Discovery Order

The borrowers had obtained a discovery order against the lender in an earlier High Court hearing in relation to a number of categories of documents including, interestingly:

“All documents evidencing or relating to the manner in which the interest rate applicable to the [borrower’s] mortgage loan account with the [lender] was calculated, including but not limited to the relationship between the said interest rate and EURIBOR, market interest rates and/or any other factor external to the [lender’s] control during the period 7th November 2007 to 31st January 2017.”

While the lender had provided some documentation (primarily copies of the lender’s internal file on the borrower’s account), the borrower asserted that this constituted a failure to make proper discovery and sought to have the lender’s action for possession dismissed on that basis. 

While not agreeing with the borrower’s assertions, the lender did acknowledge that further evidence was required to allow the court to make an informed judgment and, consequently, the lender proposed filing a supplemental affidavit in relation to fluctuations in EURIBOR over the relevant period.  The lender argued that the court then would be in a position to give summary judgment.

Judgment

Simons J decided that the interests of justice required the case to be remitted to a plenary hearing.  In coming to that decision Simons J considered the following:

• Interpretation of Interest Clause:  the meaning and effect of special condition 402 (quoted above) was not sufficiently clear to be determined on a stand-alone basis.  Consequently it would be necessary to apply a “text in context” approach to interpretation, with evidence given as to the meaning of certain terms.  For example, while EURIBOR is a well-known benchmark, it is available for a number of different periods (eg one month, three month) with different interest rates arising.  As special condition 402 does not reference the relevant period, evidence will be required to clarify what would have been understood by the term.  In addition, the meaning of “market interest rate” is unclear.  It could mean interest rates offered to consumers (such as the borrowers) in the Irish mortgage market or it could mean the rates offered to the lender in the wholesale market. 

• Unfair Terms:  in interpreting the loan agreement, the court must to have regard to the Unfair Terms in Consumer Contracts Directive² and recent guidance from the Court of Justice³, which requires the court to verify that a contractual term relating to the main subject matter of the agreement (such as an interest rate clause) is in plain and intelligible language.  Following the guidance of the Court of Justice, promotional material available to the borrowers at the time the contract was entered into are relevant considerations in determining what the borrowers would have understood the loan agreement to mean.  Such additional evidence would be best brought out at plenary hearing.

• Factual Dispute:  the borrowers’ assertion that the lender had verbally agreed that interest under the loan agreement was to be calculated as a fixed rate above EURIBOR might be borne out at a plenary hearing.  The borrowers argued that an audio tape obtained on discovery supported this assertion. Simons J said that this factual controversy can only be resolved by way of oral evidence and cross-examination.

• Difficult Question of Law:  the correct interpretation of special condition 402, raises difficult questions of law and interpretation, which would be best considered following the exchange of considered pleadings.  There is little by way of domestic case law on the interpretation of clauses governing the calculation of interest and the existing precedent that Simons J pointed to expressly adverts to the possibility of the borrower challenging the basis upon which interest has been varied over the period of the loan.

• Discovery:  finally, the very fact that discovery has been granted in this case tends to confirm that the issues arising are not ones which can be dealt with in a summary manner. There also remains outstanding a dispute between the parties as to whether the lender had properly complied with the High Court’s earlier order for discovery (in relation to the basis on which the lender calculated interest).  The submission of pleadings and further evidence would inform whether or not further discovery was in fact required by the lender.

Comment

The calculation of interest can be a technical and complex process.  Outside of high value transactions between sophisticated parties, it is not something that parties to a contract tend to give a great deal of thought to.  This summary judgment points to the need, however, to give careful consideration to the drafting of the relevant interest rate clause, especially in the case of standard form documents that will be used for high volume business.  A well-drafted clause would usually provide the lender with a discretion to vary the interest rate over time, thus avoiding the complications arising in this case.  Simons J commented in particular on the absence of this discretion, as well as the lack of clarity as to how the relatively specific references in special condition 402 were to operate.

While this case is at an early stage, the remarks made by the court are important and it will be very interesting to see how the court ultimately decides the dispute following plenary hearing.  Lenders and loan purchasers alike should keep an eye out for any generally applicable decisions in relation to interpretation of the interest rate calculation clauses.

Also, when approaching enforcement proceedings, they should be aware that where discovery is potentially needed to address disputes around, for example, interest rates, this may be an indicator that summary disposal is inappropriate and a remittal to plenary hearing is on the cards. Where discovery is sought in respect of variable interest rates, then the scope of discovery required to explain how those rates are set is also likely to give rise to debate between the parties.