Determination of Invalidity or Swiss Franc Loan Conversion? Swiss Franc Loan Agreements in the Light of the Supreme Court’s Jurisprudence.

According to many statistics available online, common courts more frequently declare loan agreements linked to CHF invalid than they apply “de-CHF-ing” of such agreements. “De-CHF-ing” means that the agreement may continue to be valid under the existing conditions (with interest based on the LIBOR rate) after removing the unlawful currency indexation clauses related to the loan amount and instalments.

The resolution of the Civil Chamber of the Supreme Court was intended to unify the case law regarding the effects of declaring abusive indexation clauses in Swiss franc loan agreements. Such a resolution has the force of legal principle and would therefore bind all common courts and the Supreme Court directly. The questions addressed to the Supreme Court concerned, among other things, the possibility of continuing performance of indexed and denominated loan agreements after eliminating the unfair indexation mechanism. Due to the lack of a response to these questions in the form of a long-awaited resolution, one can only rely on already issued rulings of the Supreme Court, which are binding in the cases in which they were issued, to determine the current position of Poland’s highest court on this matter.

At the outset, it can be signalled that the position expressed by the Supreme Court in this context is not uniform.

The Supreme Court in several rulings indicated that after removing the unlawful currency clause, the agreement may still exist, meaning that the loan in Polish zlotys is subject to interest based on the LIBOR rate. These include, among others, Supreme Court rulings of 4 April 2019, III CSK 159/17, and 27 November 2019, II CSK 483/18. The reasoning of these rulings contradicts the argument advanced by bank attorneys that a PLN loan agreement without foreign currency linkage cannot be indexed by LIBOR. According to these attorneys, the LIBOR index is legally and functionally connected to foreign currency-indexed or denominated loans, and without such a currency link, using LIBOR in the loan agreement is unprofitable for the bank; thus “de-CHF-ing” is an inadequate sanction for applying unlawful contractual provisions. Meanwhile, the Supreme Court clearly stated that — “The issue of ensuring the bank’s profitability from the loan agreement is secondary to the preventive nature of the sanction of ineffectiveness of an abusive clause (…) There is therefore no reason for the interest rate to be other than LIBOR; the sanction for the defendant for using the unfair indexation clause is essentially loan interest at a lower rate than a loan granted in zlotys without foreign currency clauses (penalty default).” — Supreme Court ruling of 27 November 2019, II CSK 483/18.

On the opposite side is the Supreme Court ruling which supports declaring Swiss franc loan agreements null and void after removing abusive clauses. In the ruling of 11 December 2019, case no. V CSK 382/18, the Supreme Court took the view that a loan agreement after elimination of unlawful provisions should be considered void. As argued by the Supreme Court in that case — “It must be accepted that eliminating the exchange rate risk characteristic for a foreign currency-indexed loan agreement, which justifies linking the interest rate to LIBOR, is tantamount to such a far-reaching transformation of the agreement that it should be regarded as a contract of a different nature and character, even if it remains only a different subtype or variant of a loan agreement. This means, in turn, that after removing such clauses, maintaining the agreement as intended by the parties is not possible, which supports its total invalidity (ineffectiveness).”

Consequently, the Supreme Court’s position is inconsistent regarding the effects of removing unlawful indexation clauses. The chronology of the above rulings suggests that the Supreme Court tends towards recognising the effect of invalidity of the loan agreement. The adoption of a resolution by the Civil Chamber of the Supreme Court would unify the Court’s stance regarding the effects of eliminating these abusive clauses. However, at present, although common courts tend to invalidate such agreements, due to the opinions expressed by the Supreme Court, “de-CHF-ing” of the agreement still has a good chance of being accepted by courts. Therefore, when bringing a case to court, one can still expect that if indexation clauses are found abusive, the outcome may be either invalidity of the agreement or “de-CHF-ing”. For this reason, it is generally recommended to formulate a primary claim regarding invalidity of the agreement and, alternatively, a secondary claim concerning “de-CHF-ing”.