No Obligation to Pay Negative Interest from Promissory Note Loans – Recent Developments through the BGH Decision
The framework conditions in the financial markets have fundamentally changed over recent years. In particular, the phenomenon of negative interest rates on deposits or loans within German banking and capital market law has opened up new liability and contract law issues. Companies, institutional investors, and wealthy private individuals are increasingly faced with the challenge of proactively understanding the legal consequences of negative interest rates on various loan types.
A current legal dispute between a public-sector credit institution and a lender over the effectiveness of an obligation to pay so-called negative interest from a promissory note loan has now involved the Federal Court of Justice (BGH, judgment of May 9, 2023, Case No. XI ZR 544/21). The decision made there provides clarity regarding the (non-)obligation to pay negative interest (“interest below zero”) on an already disbursed loan amount within the framework of a promissory note loan.
Promissory Note Loans: Legal Nature and Contract Design
Characteristics and Market Standard
The promissory note loan is a widely used form of credit in the institutional sector – particularly among companies and public-sector lenders – characterized by a comparatively uncomplicated conclusion process and frequently standardized contract terms. Unlike traditional bank loans, the loan is not necessarily offered publicly but is documented bilaterally between the contracting parties. The interest rate structures typically orient themselves on reference interest rates (e.g., EURIBOR), to which a contractually agreed surcharge or discount (spread) is added.
Development of the Interest Landscape
With the introduction and continued use of negative reference interest rates in the Eurozone, the question became relevant whether contractually agreed interest obligations could also lead to an actual payment obligation of the lender, if the calculation results in a negative value due to the reference interest rate. Banks and institutional borrowers faced and continue to face the challenge of determining the original intentions of the parties in setting standards for contract interpretation.
Subject Matter in the Legal Dispute: Negative Interest in Promissory Note Loans
In the original case, a lender (the state) granted a credit institution a long-term promissory note loan, the interest calculation of which was based on the respective EURIBOR. After the relevant reference interest rate fell into negative territory and the sum of the reference interest rate and the agreed surcharge fell below zero, the credit institution demanded the payment of negative interest from the lender. The lender refused, arguing that there was no contractual obligation to pay negative interest.
Federal Court of Justice Decision: No Automatic Obligation to Pay Negative Interest
Key Lines of Argumentation
The Federal Court of Justice clarified: The mere drop of the interest component of a promissory note loan into negative territory – whether due to a negative reference interest rate or a corresponding calculation formula – does not fundamentally lead to an independent obligation of the lender to pay the borrower. The relevant contract interpretation neither from the wording nor from the systematic consideration of the loan agreement nor from supplementary interpretation criteria results in an obligation to pay negative interest, insofar as the parties have not expressly agreed this.
A credit institution cannot derive from the fact that a negative result arises in the interest calculation formula any demand that goes beyond the actual purpose of the contract. The basis of the claim for interest payment is always the consideration owed in exchange for the provision of capital – but not a claim that goes beyond this framework for the lender to pay reciprocal interest payments.
Relevance of Party Agreement
It is particularly important that the contracting parties can generally design the modalities of interest calculation, especially the handling of negative interest, freely and in accordance with the situation. However, the lack of explicit provisions regarding negative interest is to be interpreted according to the court’s view in such a way that no contractual obligation to pay such interest exists. The BGH decision thus reflects an interpretation preference corresponding to the model of German contract law for a fundamentally interest-free provision of capital by the lender, insofar as and as long as no positive interest accrues.
Limitations and Classification
The BGH based its decision on the specific contract modalities to be assessed. Transferring the principles of the decision to all forms of loan agreements (in particular bilateral special arrangements or syndicated loans) requires a detailed examination of the respective contractual context. It remains to be considered that within the scope of contractual freedom, the parties can expressly agree on negative interest (in the sense of a reciprocal payment obligation of the lender) – such an exceptional case was not the basis of the examined facts.
Implications for Practice and Future Contract Design
Significance for Companies and Investors
The landmark decision of the Federal Court of Justice particularly affects institutional investors, companies, and public-sector credit institutions that have entered into older promissory note loan agreements with variable interest bases. For the future design and negotiation of credit agreements, it is advisable to transparently regulate the effects of negative reference interest rates at the time of conclusion to prevent uncertainties due to market fluctuations. In constellations with standardized contract templates, careful examination and – if desired – expansion of interest clauses gain importance.
Open Questions and Future Court Decisions
With the handling of the obligation to pay negative interest in the context of promissory note loans, a fundamental aspect is clarified. Further unresolved issues, such as the scope of supplementary interpretations, potential reclamation rights, and impacts on other forms of credit, could be the subject of future jurisprudence; the individual contract situation remains decisive for this.
Conclusion
The Federal Court of Justice’s decision of May 9, 2023, provides both credit institutions and lenders with orientation foundations for dealing with negative interest from promissory note loans. For companies, investors, and financing credit institutions, an individual review of existing or negotiated credit agreements is advisable given the multifaceted contract variants, to classify legal and economic risks based on current jurisprudence. For any further questions regarding interest rate structures, contract interpretation, or disputes in banking and capital market law, the advisors of MTR Legal Attorneys are competently available. Further information about our services can be found under Legal Advice in Banking Law.
