Beware the Implications of Contractual Entitlements

A recent High Court decision has clarified how courts can interpret finance agreements, specifically when a bank can change how interest is charged. The decision helpfully restates the principles for interpreting contracts and highlights the importance of spotting potential issues before signing a contract. Our Commercial Disputes team examines the decision below.

The High Court has recently had to interpret a finance agreement and determine whether the terms of the contract allowed for a variation imposed to the charging of interest.[1] The result of the variation imposed by the bank cost the borrowers significantly more in interest over the life of the finance arrangement. The borrowers disputed the bank’s entitlement to vary the manner in which the interest was charged. In determining that the bank was permitted to do so, the court usefully restated the principles applicable to contractual interpretation. The decision also serves as a reminder that those entering into contracts should pay attention to all relevant terms to avoid surprises down the line.

Background

The plaintiffs in this case had borrowed a significant sum of money to buy and develop an industrial site. They entered into a written finance agreement with the defendant bank in 2009. In accordance with the agreement, the facilities were restructured in 2010 into a single commercial mortgage repayable over 240 months.

The bank advised in 2011 that it was changing the method of calculating interest, from one referable to Euribor[2] to one referable to the bank’s cost of funds. Euribor, or ‘Euro Interbank Offered Rate’, is a benchmark rate at which European banks lend money to each other on an unsecured basis.

Although the borrowers made the relevant interest payments, they reserved their rights and confirmed an intention to pursue the matter further. The mortgage was discharged in 2017 and, armed with expert evidence that they were charged €738,440 more interest than they should have, the borrowers commenced proceedings. The letter of loan offer made it clear that the terms and conditions were those set out in the loan offer together with the standard terms and conditions of the bank, which were appended. The form of acceptance included wording to indicate the borrowers had read and agreed to be bound by and fully accepted all terms and conditions, including those in the appendix.

There was no dispute that the rates set out in the loan offer letter itself were referable to Euribor. However, the standard terms and conditions identified that the interest rate applicable was a fixed money market rate, but one relevant component was the cost of funds. Most importantly, the final sub-clause in clause 5 of the standard terms and conditions addressed changes to the calculation of interest. It provided that:

“The method for calculating interest and the interest rate may be changed in respect of all facilities from time to time at the Bank’s absolute discretion, whether to take account of a change in prevailing market conventions or otherwise…”

The plaintiffs argued that the bank could only change how interest was calculated if there was a change in 'prevailing market conventions,' and not for any other reason.

The law

Mr Justice O’Donnell noted that in Law Society of Ireland v Motor Insurers Bureau of Ireland[3] the Supreme Court had restated the approach to contractual interpretation. In doing so, it reaffirmed the general and well-known principles set down in Investors Compensations Scheme v West Bromwich Building Society.[4] As put by the Supreme Court, contractual interpretation:

“… is not merely therefore a question of analysing the words used, but rather it is the function of the court to try and understand from all the available information, including the words used, what it is the parties agreed, or what it is that a reasonable person would consider they had agreed. In that regard, the Court must consider not just the words used, but also the specific context, the broader context, the background law, any prior agreements, the other terms of the agreement, other provisions drafted at the same time and forming part of the same transaction, and what might be described as the logic, commercial or otherwise, of the agreement.”

Mr Justice O’Donnell also cited Brushfield Ltd v Arachas Corporate Brokers Ltd[5] to identify a number of relevant principles, including the following:

• The process of interpretation is entirely objective – consideration will not be given to previous negotiations between the parties or their subjective intentions or understandings of the terms agreed.
• The court looks at what the contract would mean to a reasonable person who had all the background information available to the parties when the contract was signed. The court will look not just at the specific words of the contract – they must be considered in the light of the contract as a whole and in the appropriate context.
• The appropriate context includes anything that was reasonably available to the parties at the time the contract was signed, such as objective background facts or provisions of law that would have been understood by a reasonable person.
• The interpretation should not be approached through the prism of the immediate dispute between the parties.

Application

The plaintiffs argued that a change based on market conventions - such as how Euribor is typically calculated - would be allowed. However, they also argued, supported by expert evidence, that the bank’s switch to using its ‘cost of funds’ as the reference rate was actually due to a change in ‘market conditions’ - factors beyond the bank’s control. They therefore argued that the bank’s discretion to change the interest calculation could not be used in response to a change in ‘market conditions’, since there had been no change in ‘market conventions’.

The Court considered that the bank’s reasons for making the change were irrelevant to the interpretation of the contract. It stated that the experts' respective opinions did not assist in the interpretation of the contract. The court also dismissed the commercial profitability of the deal between the plaintiffs and the bank as being irrelevant. Although the court warned that “language and proper context are the critical factors”, Mr Justice O’Donnell expressed the view that commercial common sense may be of limited assistance. The key question was whether the discretion was exercisable only in the context of a change in market conventions. The court rejected the plaintiffs' interpretation, ruling that the phrase ‘or otherwise’ did not limit the bank’s discretion and instead highlighted how broad it was. In that context, the reference to ‘change of prevailing market conventions’ was merely illustrative. The court went on to reference a scenario where the bank had not afforded itself any power to vary interest rates over the 20-year term where changes could make the loan non-commercial from the lender’s perspective, which would be “unusual” and one that “made scant business sense for a lending bank”.

Ultimately, the court came to the view that, on its terms, the final sub-clause of clause 5 in the standard terms and conditions allowed for the variation that was implemented in this case. Therefore, the court answered the question of whether the bank was entitled to vary the interest rate in the affirmative.

Conclusion

The decision here usefully restates the essential principles of contractual interpretation. It serves as a reminder that courts will focus on the wording and structure of a contract rather than the intentions or expectations of the parties involved. This is borne out by the fact that one of the borrowers referenced the plaintiffs’ preference for Euribor, since it was market-related and not fixed by an individual bank. In addition, it was noted that some plaintiffs had not clearly demonstrated they had fully read the terms and conditions, raising doubts about their awareness of the issue. Had they done so, they might have raised concerns before agreeing to the finance arrangement, potentially avoiding the unsuccessful litigation.

For more information and expert advice on commercial disputes, contact a member of our Commercial Disputes team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] Harte & Ors v Governor and Company of the Bank of Ireland [2024] IEHC 714

[2] Euribor, or ‘Euro Interbank Offered Rate’, is a benchmark rate at which European banks lend money to each other on an unsecured basis.

[3] [2017] IESC 31

[4] [1998] 1 All ER 98

[5] [2021] IEHC 263