OGH on Permissibility of Interest Escalating Clauses

Dec 13, 2024 Benn-Ibler Rechtsanwälte

The Austrian Supreme Court (Oberster Gerichtshof, hereinafter OGH) has ruled on the question of whether a loan agreement is null and void on account of, among other things, an agreed interest escalation clause.

In the case at hand, the plaintiff, a consumer, and the defendant bank had entered into a contract to borrow money in 2002. The agreement provided that the interest rate would be adjusted according to the development of refinancing costs, using 1-month LIBOR of .125 percent as an indicator of refinancing costs (i.e., an escalation clause).

In fact, rounding was done on a commercial basis throughout the credit relationship, so that if the first decimal to drop was 0, 1, 2, 3, or 4, it was rounded down. In all other cases it was rounded up.

The plaintiffs sought, among other things, a declaration that the entire credit agreement was null and void. Both the court of first instance and the court of appeal dismissed the plaintiffs’ main claim.

The OGH ruled that interest escalation clauses must meet the criteria of Section 6(1)(5) of the Austrian Consumer Protection Act (Konsumentenschutzgesetz, hereinafter KSchG). According to this provision, such contractual clauses are invalid if the entrepreneur is entitled, upon request, to a higher fee for his services than that stipulated in the contract. This is the case unless the contract also provides for a fee reduction if the agreed conditions for a fee change are met.

If a creditor, irrespective of the wording of the clause, has not rounded unilaterally for more than two decades, but has rounded in a commercial manner, this practical approach is a clear indication that the clause should not allow unilateral rounding contrary to Section 6(1)(5) of the KSchG, even at the time of conclusion of the contract. Practical experience has shown that creditors are satisfied with a certain (and, compared to the wording of the contract, disadvantageous) type of contractual performance if it corresponds to the creditors’ actual understanding of the contract and thus also to their actual commercial intention.

If such a commercial intention can be assumed, it is no longer relevant whether the wording of the clause expressly excludes rounding, because the concurrent commercial intention is relevant even if it is not reflected in the wording of the contract.

OGH 4 Ob 4/23a (22 October 2024)