How defined must interest rates be?

Two cases handed down in the superior courts of Queensland this month grapple with the requisite level of certainty of interest rates in loan agreements for them to be enforceable. 

In Westpac Banking Corporation v Lomas [2014] QSC 117 the lender sought summary judgment. It was opposed by the borrower on the grounds that the default interest provision in the loan agreement was illusory and void because it allowed the bank to select any interest rate it pleased. 

Relevantly, the loan agreement contained the following:

You agree to pay: 

interest on overdue amounts including excesses above Facility Limits at the Unarranged Lending Rate, which will be determined by the Bank from time to time.

Advertisements of our current variable base rates … and the Unarranged Lending Rate will appear in the Australian Financial Review and The Australian every second Monday. If Monday is a public holiday, the advertisement will appear on the next business day. We will also give you information on current interest rates … on request.”

The lender submitted that the “Unarranged Lending Rate” was a benchmark rate determined by objective criteria, was published in the newspaper and applied to all customers whose loan agreements contained reference to it. The borrower submitted that the “Unarranged Lending Rate” was not so defined in the loan agreement and was merely a rate that could be determined by the lender from time to time at will.

The Court considered various cases from the 1970s in which a contract will be illusory if a substantial obligation is left entirely to the discretion of one of the contracting parties. However the court determined that in this case, the “Unarranged Lending Rate” was not a rate that was intended by the lender to be applied in any way it chose, but one that applied to all similar customers of the bank and was readily ascertainable from the nominated newspaper advertisements.

In Australian Executor Trustees v Prodap Services [2014] QCA 142, the borrower similarly argued, in response to a summary judgment application by the lender, that a provision in the loan agreement which permitted the lender to change the interest rates without the borrower’s consent was void for uncertainty.

The loan agreement relevantly provided:

WARNING. We may do any of the following without your consent:

Change the interest rate if it is variable.

…The Lender may change the interest rate at any time, except in respect of a fixed rate loan during the fixed rate term.

There were similar provisions about notice of changes by way of advertisement in major metropolitan newspapers.

The borrower argued that these clauses meant that interest rate changes were entirely at the lender’s discretion and there was no mechanism specifying how or when it would be changed, or against which it could be assessed or verified.

The lender tried to argue that there was an implied term in the loan agreement that the interest rate changes would be fair and reasonable.

Whilst the Court of Appeal accepted that had there been an implied term that the interest rates be fair and reasonable, that would have saved the clause from uncertainty, no evidence that the interest rate changes were actually accurate, fair or reasonable was tendered by the lender, and so the court could not find in the lender’s favour.

It is therefore clear that provisions for interest rate changes in loan agreements, seemingly subject to the lender’s whim, should be supported by reference to the benchmark interest rate and should be determined by objective criteria and applied across the board to borrowers to ensure they can be relied upon. Lenders should also ensure that borrowers receive adequate notice of such changes.

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