This content is from: Local Insights

Poland: Beyond the letter of the law

Borys D Sawicki
The relative positions of bank and borrower are not equal. Typically, the bank enjoys a privileged position, being entitled to unilaterally affecting the legal relationship created by a loan agreement by terminating it in the event of a termination prerequisite. Under the applicable provisions of the Polish Banking Law, if the borrower fails to comply with the conditions of granting the loan or loses their creditworthiness, the bank may reduce the amount of the loan or terminate the loan agreement.

However, it would seem reasonable to require banks not to stick to the literal wording of the above-mentioned provision of the Banking Law, but rather look at the purpose of the regulation, which serves as a tool for the safe management of credit risk, allowing for the maintenance of the bank's financial liquidity.

The latter approach has recently gained support from the Polish Supreme Court. In its judgment of May 23 2013, the court considered a case where a bank had terminated a mortgage loan agreement (originally entered into for the period of 35 years). The reason for the termination was a minor delay in the repayment of an amount constituting less than 1% of the principal of the loan. The Supreme Court concluded that, in principle, a delay in repayment of an instalment falls within the scope of failure to comply with the conditions of granting the loan and that, as such, it may constitute a termination prerequisite. According to the court, the term "conditions of granting the loan" referred to in the Banking Law includes both the conditions the fulfilment of which is required at the time of bank's decision to grant the loan and those which relate to the (subsequent) performance of the contract.

At the same time, however, the Supreme Court stressed that the bank's response should be adequate to the borrower's breach of the loan agreement. In particular, the bank should have taken into account the amount of the instalment not paid on time relative to the total outstanding amount of debt, the long-time nature of the legal relationship created by the mortgage loan, as well as the minor character of the breach. Additionally, before the contract's termination, the bank should have examined whether the repayment of credit was at risk. In this case, the bank did not examine the issue. The Court noted that, given the establishment by the borrower of the mortgage securing the loan, there was no financial risk for the bank caused by the default in repayment of a single instalment.

In the ruling, the Supreme Court referred to the general clause of abuse of rights under Polish law. According to this clause, one may not use a right contrary to its socio-economic purpose and the principles of community life. In other words, the clause applies to the exercise of an otherwise legitimate right in a way which does not comply with society's moral standards.

Based on this principle, the Court ruled that, because of the minor nature of the breach and the bank's failure to assess the credit risk, the termination of the loan agreement was an abuse of right and therefore ineffective. If the bank had conducted a procedure aimed at determining the borrower's creditworthiness and confirmed the risk of loss, the termination would not be deemed as an abuse of the bank's right.

Recapitulating, a breach of a loan agreement does not always justify the bank's right to terminate it. While enjoying the right to unilaterally affect the legal relationship with the borrower, the bank must take into account the interests of the former and avoid the unsubstantiated termination of a contract.

Borys D Sawicki

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