The Finnish Supreme Court issued on 23 February 2016 a precedent ruling (KKO 2016:10) according to which a bank did not have the right to increase the loan margin unilaterally pursuant to the applicable general terms and conditions of the promissory note. The ruling is first of its kind and, therefore, constitutes a landmark case.
The key issues considered by the court in the case were the interpretation of the concept “bank’s funding costs” and whether sufficient evidence was presented by the bank to support the view that such costs had indeed increased within the meaning set out in the promissory note.
Background of the case
The principal issue of the case was whether the bank had the right to unilaterally increase the loan margin as a result of the bank’s increased costs of funding. Pursuant to the applicable general terms and conditions of the promissory note, the bank could unilaterally increase the margin if it was justifiable based on the bank’s increased funding or other costs and provided that at the time of executing the promissory note the bank could not reasonably expect such costs to incur. In addition, the margin could not be increased more than five percentage points during the maturity, and each increase could take place only after the minimum of three years from the immediately preceding increase. Further, if the bank invoked the right to increase the margin, the relevant debtor accordingly had the right to prepay its loan(s) without any prepayment fee.
The debtors (claimants) in the case were a joint municipal authority (in Finnish: kuntayhtymä) on the one hand and a municipality and legal entities and foundations controlled by or otherwise closely connected to certain other municipalities on the other hand. The bank (respondent) was a Swedish bank operating through its branch office in Finland. The debtors had in the course of several years drawn down loans in the aggregate principal amount of almost EUR 117 million. Pursuant to their terms, the loans had long maturities and were to be repaid in one instalment upon maturity (i.e. so-called bullet loans). Further, compared to the margins generally applicable to corporate and private individual borrowers, the loans had relatively low margins (ranging from 0.018 to 0.15 per cent). The court noted that the debtors had called several lenders for bids prior to entering into the contractual relationship with the bank.
In 2009 and 2010, the bank had by notifications to the debtors unilaterally increased the margins from their initial level to 0.6, 0.618 or 0.64 per cent respectively depending on the loan in question.
Lower courts (the District Court of Helsinki and the Helsinki Appellate Court) had ruled the matter in favour of the bank.
Reasoning and conclusions of the Supreme Court
The Supreme Court first noted that the discussed term entitling to unilateral margin increase was part of the general terms and conditions drafted and used by the bank in its lending activities. The Supreme Court also found it to be indisputable that the parties had not prior to the execution of the promissory note negotiated over or even discussed the contents of such term. Therefore, the basis for interpretation was the wording of the term. If the term were to be regarded ambiguous, it would as a rule be interpreted in favour of the party not responsible for the drafting.
Secondly, the Supreme Court found that the discussed term entitling to unilateral margin increase should be interpreted narrowly. The finding was based on the reasoning that as a rule, the creditor bears the risk associated with the cost of funding (whereas the borrower bears the risk associated with the applicable reference rate). Moreover, in this particular case the purpose of the public procurement carried out by the debtors could in the Supreme Court’s view be endangered if the bank could change the price of credit after the procurement.
The Supreme Court additionally found that specific weight should be laid in the interpretation on how the debtors could have reasonably been expected to understand the contents of the discussed term (upon entering into the promissory note). This was based on the reasoning that the discussed term was drafted by the bank and regarded by the court to be one-sided. Further, based on the expertise of the bank, the court regarded the bank to be in a better position to evaluate the contents of the discussed term than the debtors.
Further, the Supreme Court found that the bank’s funding costs were not defined in the promissory note. Therefore, such costs could be interpreted to comprise either all of the funding costs (as was argued by the debtors) or, alternatively, the funding costs associated with floating rate lending only (as was argued by the bank). One of the key controversial issues was whether the reference rate applicable to the bank’s own funding should be taken into consideration when calculating the bank’s funding costs or not. In the Supreme Court’s view the debtors could not (upon entering into the promissory note) understand that the “bank’s funding costs” referred to certain costs or certain part of the bank’s funding only. Therefore, the Supreme Court found that the discussed term should be interpreted to comprise all of the bank’s funding costs (including the applicable reference rate) associated with all its lending activities. Further, the Supreme Court found that as such no conclusion on the possible changes in the bank’s funding costs could be drawn based solely on the general development in the financial markets.
Finally, since the evidence presented by the bank mainly involved the costs associated with floating rate lending, the Supreme Court found that the bank had not presented sufficient evidence of the overall increase in their funding costs. Accordingly, the Supreme Court ruled the matter in favour of the debtors.
Impact of the ruling
As indicated in the Supreme Court’s ruling, it should usually be beneficial for the lenders to try to define the concept of funding costs more precisely in the credit terms. A reference to the lender’s funding costs will, at least according to the ruling, otherwise be interpreted to comprise all of the funding costs associated with all their lending.
The ruling also indicates, rather surprisingly, that even municipalities and other (public or private) legal entities and foundations can be regarded as so-called weaker parties of credit agreements. In the broader picture, such conclusion could potentially have a large impact on the remedies available to the borrower against the lender, including, for example, possible adjustment of credit terms considered unfair by the borrower. Therefore, it would be important to seek to confirm the parties’ understanding and intent in respect of the credit terms and, to the extent possible, document it. Further, it may at least in certain circumstances be beneficial for the lender to require that the borrower is advised by professional advisers in connection with granting of credit.