The Supreme Court has dismissed an appeal brought by commercial borrowers challenging a bank's decision to change the method of calculating interest on their loans, finding that the relevant contractual clause conferred a broad discretion to alter the applicable interest rate.
Delivering judgment, Mr Justice Gerard Hogan held that although courts should interpret contractual provisions granting extensive unilateral powers strictly, the wording of the agreement clearly permitted the bank to change the method of calculating interest, including by replacing the reference rate used.
The appellants borrowed €15 million from the respondent bank in November 2009 to develop an industrial site in Rathcoole, Co. Dublin. In October 2011, the bank notified them that it was changing the method of calculating interest from the EURIBOR rate to its Bank Cost of Funds (BCOF) rate.
Following repayment of the loans in 2017, the appellants commenced proceedings alleging that the change breached their loan agreements and resulted in additional interest payments of €738,440.
The borrowers argued that Clause 5 of the bank's standard terms and conditions permitted changes to the calculation of interest but did not authorise the replacement of a fundamental component of the interest rate formula. They further contended that the bank's discretion was limited to circumstances involving changes in prevailing market conventions or similar developments.
Having unsuccessfully challenged the bank's decision before the High Court and Court of Appeal, the borrowers appealed to the Supreme Court on the proper interpretation of Clause 5 and the limits of the bank's contractual discretion.
Mr Justice Hogan acknowledged that the clause appeared to confer sweeping powers on the bank to unilaterally alter important elements of the contractual agreement. He emphasised that where a standard-form contract gives a dominant contracting party the power to change a fundamental feature of the bargain, courts should be slow to infer such authority from doubtful or ambiguous language.
However, the Court found that the wording of Clause 5 was sufficiently clear. In particular, the phrases “whether to take account of a change in prevailing market conventions in Ireland or otherwise” demonstrated that changes in market conventions were merely an example of circumstances in which the bank could exercise its discretion, rather than a restriction on that power.
The Court also rejected the distinction advanced by the borrowers between changing the method of calculating interest and replacing a component of the interest rate formula. Mr Justice Hogan held that altering a component of the formula fell directly within the contractual power to change the method of calculating interest.
The Court noted that there was no allegation that the bank had acted unreasonably, capriciously or irrationally. Expert evidence also indicated that the bank had effectively been excluded from the EURIBOR short-term borrowing market during the financial crisis.
While recognising the principle of contra proferentem, under which ambiguous contractual provisions may be interpreted against the party responsible for drafting them, the Court found that the principle did not apply because Clause 5 was not reasonably capable of two competing interpretations.
Accordingly, the Supreme Court concluded that the bank was contractually entitled to restructure the interest rate by replacing EURIBOR with the BCOF rate. The appeal was dismissed.