The topic of "negative interest" is still of great relevance for banking practice. There are currently no serious signs of a change in interest policy at the European Central Bank (ECB). Since our last contribution on negative interest (see Update Banking and Finance December 2017) the topic has been addressed in two decisions in case law. This has also led to the legal discussion becoming more intense.
Applicability of loan facility law
In its decision of 26.01.2018 (case no. 4 O 187/17) Tübingen Regional Court decided whether and how negative interest on demand deposits, time deposits and fixed-term deposits can be agreed. Thereby it held the view that both time deposits and fixed-term deposits have to be treated as customer loans to the bank within the meaning of section 488 German Civil Code because of their (minimum) terms. Demand deposits, i.e. in particular unrestricted overnight deposits with daily availability without notice period, are on the other hand to be classified as an irregular form of custody within the meaning of section 700 (1) German Civil Code. However, here as well as the provisions on the loan facility pursuant to section 488 German Civil Code will also apply. As a rule in the case of deposit transactions there is no true custody agreement where the interest of the customer in custody is in the forefront.
No negative interest as statutory rule
Therefore the law on loans is applied to deposits either directly or through section 700 (1) German Civil Code. Tübingen Regional Court holds the view that the law on loans does not include any remuneration duty of the lender. This would rule out the levy of negative interest. The court did point out that there is no statutory definition of interest, but by referring to the Federal Court of Justice the decision did assume that loan interest generally "is understood to be the remuneration independent on profit and turnover and dependent on term to be paid in monetary form or in other acceptable forms for the possibility of using capital". The transfer from a positive or zero interest to negative interest would therefore lead to a reversal of the payment obligations, thus changing the character of the contract. Negative interest would lead to the bank customer being obliged to pay a fee to the bank in addition to handing over of the funds, contrary to section 488 German Civil Code.
Munich Higher Regional Court comes to the same conclusion in its decision of 11.01.2018 (case no. 23 U 1783/17): In another context (i.e. interest for the default of repayment of profit participation certificate capital) the Senate states that there is no negative interest. The basic interest rate which in a few cases is cited in legal commentaries as an example of a statutory (potentially) negative interest rate is purely an arithmetical value. A custody fee which would de facto be constituted by such negative interest is in this view not covered by the statutory model of the law on loan facilities. However, this does not alter the fact that such a fee can be agreed in an individual contract.
Agreement of negative interest in general business terms and conditions
The decision of Tübingen Regional Court relates to the agreement of negative interest in general business terms and conditions. Because of the departure from the statutory model of section 488 German Civil Code the agreement of negative interest in this way would definitely be invalid for existing agreements pursuant to section 307 (3) sentence 1 German Civil Code as read with (2) no. 1, (1) sentence 1 German Civil Code.
The introduction of a negative interest rate is not permitted either via a floating interest clause – in the specific case there was one in the individual customer contracts – as such unilateral right to determine interest is subject to the principal agreement of the parties involved. However, if there is not yet a reference to negative interest in the original contract the legal agreement of the parties involved must be interpreted to the effect that no such negative interest should be covered. Thereby the term "floating/variable interest" does not cover a duty of the customer to pay a fee.
Furthermore, according to the Regional Court, such a clause is unclear within the meaning of section 305c (2) German Civil Code and thus to be construed against the party using the clause that no negative interest is covered. Moreover, such an interest determination option constitutes a surprising clause within the meaning of section 305c (1) German Civil Code – at least for existing contracts.
Consequences for practitioners
The difference drawn by Tübingen Regional Court between existing and new contracts means that banks have to assume that their existing business relationships with private customers in deposit transactions to not cover the option to forward negative interest to the customer. Whether this view will prevail remains to be seen.
The Regional Court does not comment on the issue of whether negative interest can be introduced for new contracts. This is probably the case. Existing contracts which were not concluded in the current economic environment are to be construed in line with the view represented by Tübingen Regional Court to the effect that negative interest is not covered by the respective declarations of intent. But this can be the case for new contracts with correspondingly clear contractual agreements – also with respect to general business terms and conditions.
The need for any notice of termination pending a change of contract therefore depends in each individual case on the wording in the existing contracts and the general business terms and conditions. A simply structured floating interest clause which does not explicitly name the negative interest option is probably not enough in order to introduce negative interest for such an already existing contractual relationship.
This article is part of the Update Banking & Finance, which you can subscribe to here.