Konstantina Daskalopoulou, LL.M
Summary: In this note, we briefly examine the possibility of establishing a renegotiation obligation in the context of contracts concluded with credit institutions, with the aim of bringing them into compliance with changing circumstances that may confront the debtor with a failure to meet its contractual obligations.
Contractual relations, which have a duration over time, are influenced by the socio-economic conditions in which they develop their intended effects. If these conditions change, it becomes necessary, under certain conditions, to adapt the relevant contracts accordingly in order to adapt them to the new circumstances without affecting their validity. In this context, sometimes the parties themselves have made provision for this by providing mechanisms to enable the contractual relationship to be rescued, while in other cases there is no such contractual provision. In the latter case in particular, the question arises as to whether, despite the lack of contractual provision, the parties faced with an unexpected change in the circumstances in which they decided to enter into the contract are obliged to sit down at the negotiating table and give the contractual relationship a second chance?
Β. The bank-borrower relationship as a relationship of trust:
The financial crisis has highlighted the need to adjust the contractual relationships existing at the time of its occurrence. As a result of the widespread financial crisis, a large number of natural and legal persons were unable to meet their contractual financial obligations, including those towards credit institutions.
The relationship between the credit institution and the borrower is characterised - as a relationship that extends over time - by the development of a climate of increased trust between the parties. It has been said that the legal relationship between the customer and the bank, right from the negotiation stage, is characterised by a high degree of mutual trust that each party will make every possible and sustained effort to achieve the contractual objective pursued. The element of trust, which is considered to be a characteristic of any lasting relationship, influences the course of the contractual relationship as a whole.
In this context, case-law has consistently adopted the position that "Banks, as financial institutions, have an increased responsibility in the exercise of their financing activities and must take care of the interests of those they finance, since by its very nature the credit relationship, as a continuing legal relationship of special trust between the parties, imposes a duty of loyalty and protection on the part of the banks of the interests of their customers, in order to avoid excessively onerous consequences for them" (CC 323/2021)".
The above obligation of loyalty and protection incumbent on credit institutions derives from the principle of good faith (CC 288) and imposes on the bank the obligation to tolerate a reasonable delay in the performance of the debtor's obligation. According to the same case-law, this applies "where the creditor is unable to meet his obligations under the credit agreement because of temporary financial weakness which exceeds the limits of his endurance", in which case "good faith on the part of the bank imposes on the bank an obligation to tolerate a reasonable delay in the performance of the debtor's obligations, particularly where the pursuit of immediate performance is likely to lead to his complete financial ruin, without any real benefit to the bank. In this sense, the bank should, in the event of temporary financial weakness of its customer, avoid the hasty termination of the credit agreement between them and the closure of their current account, especially when its claims are secured by collateral in rem or personal security, and its customer is in direct financial dependence on it and does not owe any third parties, since then its actions take on an abusive character" (Case 1185/2019 - 1352/2011).
C. The renegotiation obligation as a subset of the protection obligation:
In view of the above, it is argued that, particularly in the field of banking contracts, a renegotiation obligation may be established as one of the obligations arising from the credit institution's fiduciary duty of loyalty and protection of the debtor's interests. In other words, the bank must, in the context of its obligations of prudence, behave throughout the contractual relationship in such a way as to ensure that the borrower is not over-indebted and that it will be able to cope with that over-indebtedness should it arise. Therefore, alongside the obligation to tolerate a reasonable delay in the performance of the obligation, which is consistently recognised by case-law, the existence of an obligation to act, that is to say, an obligation to renegotiate with the ultimate aim of rescuing the contract, to the benefit of both parties, is also accepted. This is because renegotiation undoubtedly serves the interests of both the borrower, who, by amending the contractual terms, will ensure that he has the time necessary to cope with his financial difficulties and comply with his contractual obligations, and the bank, which, likewise, will see the contract honoured as normal after the recovery of the debtor, avoiding the imposition of enforcement measures, the success of which is not guaranteed.
The ultimate aim of renegotiation is to provide the necessary relief to the borrower who is facing a serious difficulty in meeting his contractual obligations. Thus, depending on the characteristics of the case in question, an appropriate facility may be an extension of the loan payment period or the granting of a grace period so that, in the meantime, the debtor can regain his financial strength.
It should be noted that renegotiation is preferred to judicial intervention in the contractual relationship, which again aims to modify the content of the contract, but in a different way. Instead of resorting directly to the costly and time-consuming judicial route, the parties can try to find the 'lost balance' of the contractual relationship in a consensual manner. Indeed, renegotiation will in some cases be the only way of adjusting the content of a credit agreement. This is because, in order for the contract to successfully pass the threshold of judicial readjustment, the disturbance of the balance that has taken place must be of increased intensity; otherwise, the judge cannot intervene to correct the contractual relationship. On the other hand, given the obligation to protect credit institutions as described above, it is argued that the obligation to renegotiate exists, as a rule, in all cases where the credit is non-performing.
Compliance with the obligation to renegotiate is not, moreover, a necessary precondition for judicial adjustment; it may, however, be taken into account by the judge who will ultimately be called upon to intervene in order to amend the contract or to rule on the validity of the termination attempted without the prior intervention of a renegotiation attempt or following the bank's bad faith participation in it.
Thus, the Athens Court of First Instance, in its decision No. 5725/2016, assessed the fact that the bank did not respond to the efforts of the debtor catering company to renegotiate the terms of the contract, resulting in a less than conciliatory tactic on its part. In the crucial considerations of the judgment: "The applicant ... sent the defendant a series of letters informing her of the adverse effect of the economic crisis on the liquidity of the creditor and requesting the forfeiture of her personal guarantees, as described above, either for the repayment of the working capital, so that the company would not be burdened with excessive interest, which it could no longer afford, or for the repayment of the outstanding instalments of the loan in question (with the guarantee ". ..........."). It also proposed to renegotiate the financial terms of the loans (e.g. reduction of the interest rate on the mutual account, extension of the repayment period) in order to make them viable and to enable the creditor to cope with the new financial circumstances, and asked the creditor bank to suggest to it, through its experienced employees, possible solutions that would be acceptable to the creditor. The defendant did not respond to the applicant's anxious efforts, but instead either did not reply to her letters or replied with documents simply informing her of the amount of the arrears ... Finally, the defendant terminated the contract and closed the account of the loan in question definitively ... At her request, a decision was taken by the Commission in accordance with the procedure laid down in Article 4(1)(b) of Regulation (EC) No .... .../2015 payment order ... In view of all of the above, the termination of the loan agreement at issue and the subsequent issuance of the contested payment order are presumed to have been improperly made by the defendant bank because ... the exercise of the bank's rights against the creditor and its guarantors must be governed by the principles of good faith and sound business practice ... The creditor company ... was facing cash-flow difficulties and was trying to cope financially with the particularly unfavourable and particularly burdensome economic environment caused by the general economic crisis in the country, in order to continue to operate and be productive. However, the defendant ... unilaterally terminated the contract at issue, although it was obliged to tolerate a deviation from the agreed terms and reasonable delay, particularly in view of the fact that the claim for performance of the supply was clearly going to cause disproportionate financial problems for its debtors, whereas if the termination had not taken place, it is likely that, in the context of the contract and if the defendant had adopted a more conciliatory tactic, the balance, or at least a large part of it, would have been repaid in instalments with the survival of the company in the context of the generally attempted recovery of the Greek economy, taking into account that the defendant's claim, as was presumed, is at least partly secured at least by the personal deposits of the guarantors, which have not been forfeited and have not been used up".
D. The Banking Code of Conduct: a regulated renegotiation process?
In the General Principles of the Code of Banking Conduct (for more on the implementation of the BCC see here and here), it is explicitly stated that "The Code establishes general principles of conduct and best practices aimed at enhancing trust, mutual commitment and the exchange between the borrower and the institution of the information necessary to enable each party to weigh the benefits or consequences of alternatives to servicing (workout solutions) or final settlement (final settlement solutions) of loans in arrears with the ultimate aim of selecting the most appropriate solution on a case-by-case basis".
The CRA establishes the observance of the Arrears Resolution Procedure (ARP), which consists of several stages aimed at finding an appropriate solution for the adjustment or final settlement of the arrears. During these stages, the Code imposes certain obligations on the credit institution in order to exhaust the possibility of settling the debt before the latter terminates the contract, often with incalculable consequences for the borrower's viability.
In this context, it is rightly accepted that the provisions of the Code, in so far as they define the conduct to be displayed by both the credit institution and the borrower in the application of the stages of the ICA, constitute a concretisation of the good faith requirements of CC 288, ultimately defining the more specific content of the obligation to renegotiate. In the relevant wording of the case-law,"the Code specifies the relevant termination obligations arising from objective (transactional) good faith at the stage preceding the exercise of the right of termination (CC 281), as the content of transactional good faith was shaped in particular in the field of credit transactions in the wake of the financial crisis, which led to a rapid increase in the number of arrears. Therefore, in the event of a borrower's delay in paying a certain amount to a financial or credit institution in breach of what had been agreed between them, the exercise of the right of termination, without the institution's prior compliance, in whole or in part, with the Code's DTC, could be repudiated under CC 281 as abusive, when of course the other conditions for the application of that article are met" (CC 323/2021).
Consequently, failure to comply with the obligation to renegotiate, as specified by the provisions of the CRA, may result in the credit institution's attempted termination being characterised as abusive or even, in certain cases, in the establishment of a claim for compensation.
Ε. Renegotiation as a way of filling the gap resulting from the recognition of the invalidity of contractual terms on the grounds of unfairness:
Recent case law seems to favour renegotiation over judicial intervention, and in the more specific context of replacing a contractual term of a credit agreement which has been held invalid as unfair. The Athens Court of Appeal, in its decision No 3979/2021, accepts that the gap arising after the recognition of the invalidity of the contractual term concerning the interest rate may be attempted to be filled by means of a new agreement between the parties. In the critical considerations of that judgment: "On this issue, the CJEU clarifies that, where the contract cannot continue in force without the unfair terms and the national court cannot fill the gap with a national provision of secondary law, nothing prevents the national court from, inter alia, inviting the parties to negotiate in order to determine how the interest rate is to be calculated, provided that the court sets the framework for the negotiations and that the purpose of the negotiations is to achieve a real balance between the two parties' interests. In the case at hand, the Athens Court of Appeal considered that "...it is not considered necessary at this time to invite the parties to negotiate in order to determine themselves how to calculate the interest rate using proper criteria, given that the relevant procedure has already taken place, at a time prior to the filing of the action, in the context of the application of the Code of Conduct of Law 4224/2013 ... and the respective efforts have been fruitless".
The above decision echoes relevant considerations of the Court of Justice of the European Union (C-269/19), while it is important that the Athens Court of Appeal, like the CJEU, invites the judge to define the framework of the negotiations, focusing on achieving a real balance between the rights and obligations of the parties, obviously for the protection of the borrower, who in any case is in a weaker negotiating position vis-à-vis the credit institution.
Renegotiation enables the parties to a credit agreement to maintain the relationship between them. Recognising the existence of an obligation to renegotiate - and not simply an option - is a way of protecting the debtor, who is faced with a practical impossibility of meeting his obligations, against unilateral surprise actions aimed at a rather premature satisfaction of the credit institution's claim. In this context, it should not be overlooked that, in any event, despite any negotiating imbalance that may exist between the bank and the borrower (which, however, the legislature has provided for in a specific manner - see Law No. 2251/1994 on consumer protection), the parties are those who know better than anyone else their contractual needs and possibilities and, therefore, those who can adjust their relationship in the most effective and viable way.