Judgment of the Court of Appeal of Évora of 09-07-2015

FINANCIAL LEASING – invalidity of contract clause

In the context of a property leasing agreement, some of its clauses, under the title “compensation”, stated that “the termination or expiry of the agreement for reasons not attributable to the lessor requires the lessee to pay the lessor, in addition to the lease payments outstanding and not paid (…) compensation of 20% of the amount of the lease payments due”. This establishes a penalty clause, in other words, the agreed amount of the compensation due, provided for in Art. 810.1 of the Portuguese Civil Code. In addition, Art. 19(c) of the Law on Standard Business Terms provides that “depending on the standard negotiating framework, in particular, general contract clauses that (…) establish penalty clauses disproportionate to the losses to be make good are prohibited”.

As noted by the Court of Appeal, the percentage of 20% of the lease payments due has been accepted since the emergence of this type of contract, both by virtue of the intervention of Banco de Portugal and by case law, which has considered it a “percentage appropriate to the type of contract in question, not being disproportionate”.

Quoting Prof. Calvão da Silva, the Court mentioned that “judicial control of the penalty clause is required, but limited merely to the correction of infringements; it is merely required to protect the debtor from the iniquities of creditors, but not to deprive creditors of their rightful interests, which include that of the penalty clause as a form of pressure over debtors in order to encourage them to comply with the payment due, which means that in fact it has a moralising effect of ensuring respect for to word given and agreements». It concludes, therefore, that “there is no doubt that this is a situation in which the lessor receives a considerable amount as superprofit, which, together with the other contractual circumstances, must be sufficient to hold the clause blatantly excessive, not demonstrating just a penalty greater than the damage but revealing a clear, patent, substantial and extraordinary disparity between the damage caused and the penalty stipulated”.

After thorough analysis, the Court noted that the “validity of this penalty clause will have to be determined in the specific and global context of this type of agreement, bearing in mind the nature of the proposer’s activity, the specific characteristics of the transaction, the amount of the penalty envisaged therein against the foreseeable losses due to the other party’s failure to comply with the agreement”. The Court therefore decided that the Plaintiff did not suffer losses from the non-compliance of the Defendant and, as such, the penalty clause established was blatantly excessive, for which reason it must be reduced to 50% of its value.

Judgment of the Court of Appeal of Lisbon of 02-07-2015

Bank – Interest rate swap contract – Duty of information – Invalidity of contract – Termination of contract

The Client (Plaintiff) and the Bank (Defendant) entered into an “Interest Rate Swap Contract”, under which “the Bank pays the Client at the end of each quarterly period between the Start Date and the Maturity Date, the 3-month Euribor rate (determined on the 2nd working day before the start of the corresponding quarter), calculated on the Nominal amount” and, in return, “the Client pays the Bank at the end of each quarterly period between the Start Date and the Maturity Date, the following interest rate (calculated on the Nominal amount): (i) 4.53% if 3-Month Euribor (determined on the 2nd working day before the start of the corresponding quarter) is equal to or less than 5.35%; or (ii) the 3-month Euribor rate (determined on the 2nd working day before the start of the corresponding quarter) less a bonus of 0.20% otherwise”.

In other words, as the stated in the contract itself, “its purpose is the management of the interest rate risk, in which the client pays a fixed interest rate, if 3-Month Euribor falls, remains the same or rises moderately during the term of the contract and provided it does not pass the Barrier in each quarter. If 3-Month Euribor rises sharply, passing the Barrier in any quarter, the Client shall have a gain in the contract in that quarter, corresponding to the bonus. If 3-Month Euribor falls or remain stable, the client will have, in principle, a financial loss in that quarter, given that the interest rate payable by the Bank to the Client is lower than the interest rate payable by the Client to the Bank”.

On the basis of the established facts, the Court concluded that, on the one hand, the Bank complied with its duty of information and, on the other hand, that the Client’s intent was not affected by any error concerning the reasons determining its intent or the circumstances that constituted the basis for the transaction. This therefore excludes compensation for the so-called culpa in contrahendo, as well as the claim for annulment of the contract based on an error by the Client, the Client having alleged that the Bank breached its duties to provide the necessary information for it to take an informed decision.

With regard to the classification of the contract, the Tribunal concluded that interest rate swaps are separate contractual concepts and not necessarily complementary to a loan or other type of financing agreement. Despite it being a random contract, the Court understood that the contract should not be classified or treated as a gambling contract.

The random and reciprocal payments of the interest rate swap are determined by facts outside the contract and the intentions of the parties (in the case examined by the Court this was the fluctuations of Euribor), which, at the time when the contract is entered into, made it impossible to know whether the advantage envisaged in the contract would be confirmed and which party would benefit from it.

With regard to the termination of the contract due to an abnormal change in circumstances, the Court understood that the sharp fall in interest rates was covered by the risks inherent to the contract, since it is a random business arrangement in the context of which the parties are exposed to the risk of rising or falling interest rates.

In short, the Lisbon Appeal Court rejected the client’s appeal, in which it asked for the contract to be declared null and void due to defect of intent or, ff it did not interpreted in this way, that it be terminated by virtue of an abnormal change in circumstances.