BGH: There are no negative interest rates

In its ruling of May 9, 2023, the XI Civil Senate of the German Federal Court of Justice, which is responsible, among other things, for banking and capital market law, ruled on the obligation to pay “negative interest” on a so-called promissory note loan, taking the view that there is no such thing as “negative interest” in legal terms.

Facts of the case and progress to date:

In March 2007, the plaintiff country (plaintiff) concluded a contract with the legal predecessor of the defendant bank (defendant), which was described as a “loan”, the terms of which were specified by the plaintiff. After transferring the “loan amount,” the plaintiff issued the defendant five identical promissory bills for €20,000,000 each. These are called with the words

“[Der Kläger] (loan debtor) owes [der Beklagten] (loan creditor) EUR 20,000,000 […]”

and subsequently include the following information, among others:

“1. The loan shall, […], bear interest annually until the expiration of the day preceding the agreed maturity of the principal, as follows:

Nominal interest rate 3-month EURIBOR+0.1175%

Maximum rate 5.00%

[…]

3. the loan in the nominal amount is due for repayment on 08.03.2017.

[…]

6. the assignment of the loan claim is only permitted in its entirety. […] In any case, the Loan Debtor shall transfer interest and principal payments only to an account of the Loan Creditor in the Federal Republic of Germany.”

As of March 2016, a negative value was calculated using the interest formula in accordance with Note 1, which resulted in an amount of €158,159.75 by the end of the term.

The plaintiff is of the opinion that the defendant owes him the payment of “negative interest” from the time when the interest premium (“0.1175%”) lagged behind the negative reference interest rate (“3-month EURIBOR”) in terms of amount, because an interest rate cap (“5.00%”) but no interest rate floor was agreed in the promissory bills. In his action, he is seeking an order that the defendant pay €158,159.75 plus default interest and reimbursement of pre-litigation legal fees.

The District Court allowed the claim with the exception of one subsidiary claim. On the defendant’s appeal against this, the Court of Appeal dismissed the action. In his appeal, which was allowed by the Court of Appeal, the plaintiff seeks to have the judgment of the Regional Court restored.

Senate Decision:

The Senate dismissed the appeal and ruled that, in the case of an agreement concluded under the dispositive statutory law of Section 488 para. 1 BGB, according to which a change in the referenced reference interest rate leads to an automatic change in the contractual interest rate to the extent specified by an interest rate premium and an interest rate cap, does not require an explicit specification of an interest rate floor in order to exclude or limit an obligation of the lender to pay nominally negative “interest” to the borrower in the event that the reference interest rate including the interest rate premium falls below zero.

The term “interest” is not defined in the law, but is presupposed by the private law system. Accordingly, interest in the legal sense means the payment to be made for the possibility of using temporarily provided capital, which is calculated on a time-dependent basis but at the same time independent of profit and turnover. According to this definition, interest – because it is a consideration – cannot become negative. In the normative context of § 488 para. 1 BGB, this means that a definitional lower limit of 0% is inherent in the interest rate, at which point the borrower’s obligation to pay interest ceases. This does not allow for a reversal of the payment flow from the lender to the borrower.

The Court of Appeal correctly recognized that according to the time of the conclusion of the contract, which is decisive for the legal classification, the parties are bound by a loan agreement with an interest rate agreement typical for the law. The interaction between the variable interest rate on the one hand and an interest rate cap on the other hand merely constitutes a regulation on the amount of interest in the legal sense, which the borrower is entitled to under Section 488 (1) of the German Commercial Code (HGB). 1 sentence 2 BGB as consideration for the transfer of the loan proceeds to the lender. The issuance of promissory bills cannot be used to infer the parties’ intent to create a legal entity that differs from the statutory model of Sec. 488 para. 1 of the German Civil Code (BGB). The external form of the contract cannot be given greater importance than it has according to the content of the contract.

On the basis of the principles of interpretation under the law of general terms and conditions applicable here, the interest clause in clause 1 is in line with the statutory guiding principle of section 488 (1). 1 BGB to be interpreted as meaning that the defendant is not obliged to pay the calculated “negative interest”. This follows, as the Court of Appeal also assumed, from the synopsis of clause 1 with the introduction, which is combined with it to form a unit, and clause 6. Nothing else results from the fact that the interest rate clause, unlike the interest rate cap, does not contain an express lower interest rate limit. The omission of an explicit agreement on an interest rate floor is based on the fact that the parties, at the time of the conclusion of the agreement, either assumed that the variable interest rate according to the interest rate formula agreed by them could not become negative due to the expected market development, or that they assumed, based on the guiding principle and the obligations typical for a loan agreement, that only the borrower, but not the lender, could be subject to an interest payment obligation anyway. The principle of equivalence cannot be used in the context of contract interpretation to redefine the value of performance and consideration. It is therefore irrelevant whether the Bank could expand its profit or refinancing margin if the reference interest rate, including the interest rate premium, were to fall below zero, the further the reference interest rate moves into negative territory.

From the objective point of view of the parties, this interpretation of the interest clause also corresponds to the understanding of honest and reasonable contractual partners in their capacity as professional market participants. The agreement of a specific reference interest rate – such as the 3-month EURIBOR in this case – does not permit the conclusion that the bank refinances congruently with this rate. The bank’s refinancing is usually not included in the customer’s expectation horizon anyway. In this context, it is irrelevant on the basis of the principles of interpretation of general terms and conditions applicable here whether, according to the development of interest rates up to the time of conclusion of the agreement, a drop of the reference interest rate including the interest rate premium below zero during the term of the agreement was foreseeable for the contracting parties or at least could not be ruled out.