The nullity of the “floor rate” in commercial loan agreements in Costa Rica
The First Court of the Supreme Court of Justice, through judgment 478-F-2020, recently annuled the minimum interest rate that the debtor must pay to the creditor, in accordance to what is established in a commercial loan agreement, also ordering the creditor to reimburse the money overpaid by the debtor when the reference interest rates have fallen below the agreed minimum.
In order to make that decision, the reasoning of the Superior Judges was that in the specific case, it was about a contract of adherence typical of a consumer relationship and the way in which the interests were agreed was not equitable for the parties, damaging the debtor unfairly.
Of the generalities of the interest rates and the loan agreement
In general terms, the interest rate is the price that the debtors pay the creditors for the loan and its rate depends on several factors that imply risks for both parts of the relationship.
In what concerns us, there are three types of interest rates: fixed, variable and compound.
The fixed rate is the one that does not change during the entire business relationship, giving total certainty to the parties of what the business price will be.
The variable rate is the one where the rate varies according to parameters chosen by the contracting parties or predisposed by the creditor if the relationship is of consumption. This rate by itself practically does not exist in the market since it implies a very high risk for both parts of the relationship since it makes them depend on the volatility of the market and on facts that by their nature are unpredictable.
The compound rate is the one where one portion corresponds to a fixed interest percentage and the other portion corresponds to a variable interest percentage.
In the Costa Rican financial market, it is common for commercial loan agreements to establish compound interest rates, generally being the variable percentage compared to international reference rates such as the “prime rate” or the “libor”.
Given the implicit risk in financial operations and the volatility of variable rates, it is common to establish “floor interest rates” and “ceiling interest rates” in this type of agreement. The first rates benefit the creditor and the second rates benefit the debtor. Its purpose is to control the risk assumed by the parties of the agreement, always having a certain degree of control regarding the amount to be paid or received, as the case may be.
The floor interest rate is the one that is contained in a clause of a loan agreement, by means of which a minimum percentage limit is established that the debtor must pay to the creditor, regardless of whether the result of the sum of the agreed fixed and variable interest portions is lower than that limit.
On the other hand, the ceiling interest rate is the maximum percentage limit that the debtor must pay to the creditor, regardless of whether the result of the sum of the agreed fixed and variable interest portions is higher than that limit.
Of the commercial loan agreement as a contract of adherence.
The contract of adherence arises in a modern consumer society and is defined as a contract where the parties did not negotiate or discuss its terms, but one of them -the predisposing party- imposed the clauses and the other party -the adherent party- was limited only to grant its consent. In the past, due to its nature and in the absence of regulation of this type of commercial relationship, the predisposing party constantly abused the adhering party, transferring risks and charges that, in an equitable relationship, would not correspond.
For this reason, in the consumer relationship where these contracts are generated, both doctrine and jurisprudence have considered the consumer to be the weaker part and the merchant the strong part of the relationship, which imposes on the merchant the duty to inform in detail the conditions of the contractual relationship, being also the ones in charge of the proof in case of conflict.
This right to receive truthful and adequate information is of constitutional level since it is contemplated in article 46 of the Costa Rican Constitution.
On the other hand, in the contract negotiated and freely arranged by the parties, it has been considered that they are in legal equality of conditions and what is agreed is the product of the full exercise of the autonomy of the will of each one, expressed perfectly by consent, a basic element of this type of obligation. In this context and respecting the people’s freedom, the state must not intervene in the relationship and the contracting parties will assume the risks that its own provisions imply.
In general, the loan agreements granted by the banks are considered contracts of adherence, since they are complex formulas imposed by the predisposing entity and are not negotiated. For this reason, the courts have considered that this specific relationship is one of consumption, being protected by article 46 of the Costa Rican Constitution and by the Law on the Promotion of Competition and Effective Defense of the Consumer (“LPCDEC per its Spanish acronym”).
This protection also implies that the contractual relationship must be equitable and under no circumstances should it harm the financial interests of the debtor-adherent. This precept, as cited in the judgment, is contained in subsection c) of the LPCDEC, which establishes that the clauses that contain the following dispositions are void “(…) favor, excessively or disproportionately, the contractual position of the predisposing party or waives or restricts the rights of the adherent (…)”.
However, the Court clarifies that the establishment of the minimum rate per se is not illegal nor the clause is void. It is legal as long as a ceiling rate or maximum rate to be paid that correlates with the floor rate is established. Logically, an impossible to meet the ceiling rate would nullify the floor rate, according to this criterion.
In summary and according to the judgment of the Court, to determine if the clause that contains an interest floor rate in a commercial loan agreement will be declared void by the courts, it is important that the following factors occur:
1. That the relationship between the parties is a consumption relationship, and the creditor must be a merchant dedicated to the loan business.
2. That the loan agreement is a contract of adherence.
3. That there is no ceiling rate or that it is disproportionate or impossible to comply with.
4. That the debtor-consumer is not informed by the creditor-merchant of the implications that there is a clause of this nature.
If the contract is agreed between two parties on equal terms, where both negotiated its terms and freely programmed their economic interests in the document, the clause should not be void per se, as it was not an imposition of the creditor and was accepted by the debtor.