The Supreme Commercial Court Issues Clarifications in Relation to Loan Agreements

On October 14, 2011 the Russian Supreme Commercial (Arbitrazh) Court published Newsletter No. 147 "Court Practice Overview of Disputes Relating to the Application of the Russian Civil Code Provisions on Loan Agreements" (the "Overview").

In the Overview the Supreme Commercial (Arbitrazh) Court considered some controversial issues relating to corporate and bank loans. Below we discuss the most significant provisions of the Overview.

 

The Supreme Commercial (Arbitrazh) Court clarified the legality of bank fees

A bank is entitled to charge fees for provision of independent banking services. An example of such a fee is an overdraft loan fee.

Fees that are paid periodically amounting to a certain percentage of the remaining loan balance are considered to be sham, as they obscure payments for the loan. However, the parties to a loan agreement may word a condition on payment for a loan in any way they chose and therefore such fees are valid. Examples of such fees are a fee for maintaining a credit line limit and a fee for maintaining a loan account. In the Overview, bank fees were challenged on the basis of violation of rules pertaining to interest payments rather than on the basis that such fees were included in an adhesion contract (take-it-or-leave-it contract), the provisions of which can not be negotiated by a borrower or changed at his suggestion.

Fees paid in a lump sum upon the provision of a loan, for carrying out standard actions without which a bank cannot extend a loan, are void. Such actions of a bank do not constitute a separate service from the Russian Civil Code perspective as they do not create any additional benefit for a borrower. Such fees paid to a bank are void and should be returned to a borrower. Examples of such fees are a fee for approval of a loan application or a fee for granting a loan.

Loan agreements may include negative covenants

The Supreme Commercial (Arbitrazh) Court stated that provisions of a loan agreement that prohibit a borrower from engaging in certain types of transactions (so-called negative covenants), e.g. to enter into other loan agreements, suretyship or pledge agreements) do not restrict the legal capacity of a borrower or contradict the Russian Civil Code. However, the description of the actions that a borrower undertakes to refrain from under such covenants must be sufficiently detailed and the borrower's obligation to refrain from such actions must be limited in time (e.g., during the term of the loan).

In the case of violation of negative covenants by a borrower, a bank has the right to demand early repayment of a loan.

The above clarifications of the Supreme Commercial (Arbitrazh) Court relate to negative covenants included in an unsecured loan agreement. The Supreme Commercial (Arbitrazh) Court did not consider such covenants in a secured agreement; therefore the nature of such covenants in a secured loan agreement remains undefined.

The borrower can claim alteration of onerous conditions of a standard loan agreement

If in the course of execution of a loan agreement a borrower was deprived of an opportunity to negotiate the contents of such agreement, the agreement is considered to be an adhesion contract. According to the Russian Civil Code, a borrower can demand alteration of an adhesion contract containing conditions that materially violate the balance between the interests of the parties and which are therefore onerous for the borrower.

The Supreme Commercial (Arbitrazh) Court clarified that even if parties agreed upon certain provisions of an agreement (e.g. loan amount, repayment, etc.), the above rule should apply to those provisions that were imposed on a borrower as part of a standard loan agreement.

A bank should act reasonably and in good faith when unilaterally changing the terms of a loan agreement

When a loan agreement provides for a bank's right to unilaterally alter contractual terms the decision to alter such terms should be justified and based on a particular reason, which the bank should disclose. A borrower objecting to such alterations can prove that such unilateral change of terms either violates a reasonable balance of rights and obligations of the parties to the loan agreement, or is contrary to established business practices or violates the principles of reasonableness and good faith.

Alteration of terms by a bank that significantly worsens the lending terms for a borrower or that are obviously unenforceable constitute an abuse of right on the part of the bank.

A court may reduce the amount of increased interest

The Supreme Commercial (Arbitrazh) Court stated that increased interest charged when a borrower breaches its obligation to repay a loan constitutes a liability of the borrower for the breach of obligation. A court, taking into account the circumstances of a particular case, can reduce the interest under the Russian Civil Code (Article 333) on the basis of a reasoned statement from the borrower.

A court should consider the circumstances of a breach committed by a borrower and the losses incurred by a bank

In the case of early repayment of a loan a bank is entitled to damages (lost profit). According to the Supreme Commercial (Arbitrazh) Court, the following methods of recovering damages are legal:

  1. Previously the Supreme Commercial (Arbitrazh) Court in Regulation No. 13/14 of 1998 stated that when a creditor was entitled to demand early repayment, interest could be charged up until the original maturity date. However, in the Overview, the Supreme Commercial (Arbitrazh) Court admitted that charging interest up until the original maturity date may lead to a bank having a double income from lending one and the same amount of money. The Supreme Commercial (Arbitrazh) Court clarified that interest may be charged for the period after the date when a borrower repaid a loan during which the bank incurred losses due to inability to extend a loan to a new borrower (this period may be up to one month);
  2. If a bank is unable to extend the amount of a loan that was repaid early under terms similar to those in the loan agreement, because average interest rates have significantly declined, the bank is entitled to damages amounting to the difference between the rate provided in the loan agreement and the rate under which the bank is currently granting loans;
  3. The amount of damages may be also defined as the difference between the amount of interest charged at a higher interest rate, under which the bank provided loans at the time of the conclusion of the agreement (for a period comparable to the actual term of the loan), and the amount of interest at a lower interest rate actually established in the agreement.

A borrower can claim damages in case of delay in granting a loan

A bank refusing to grant a loan should prove circumstances directly evidencing the deterioration of a borrower's financial position and the fact that the loan won't be repaid when due. Otherwise, the bank's refusal is deemed to be a breach of its obligation to grant a loan. In such case the borrower is entitled to damages. The borrower's damages are considered to be the difference between the loan rate established in the agreement and the corresponding rate on the loan that the borrower obtained from another bank. The rate on the loan from another bank should be taken into account only if the lending conditions are the same, including the type and amount of the security provided.

Moreover, the period of the loan and loan amount under the agreement from the other bank should not substantially differ from those under the original agreement.

A borrower can demand return of interest paid for a period when he actually stopped using a loan

In the case of early repayment under the annuity repayment procedure (when firstly the interest for the whole term of the loan is paid), a borrower can claim a refund of interest for the period during which he wasn't using the loan. The Supreme Commercial (Arbitrazh) Court clarified that interest is charged for using money and, consequently, should be paid only for the period from the date of extension of a loan until the date of its full repayment.

For further information please contact in Moscow tel +7 495 787 27 00 Vladimir Dragunov, Andrey Lebedev or in Saint-Petersburg tel +7 812 303 90 00 Igor Gorchakov.

Baker & McKenzie