• Admissibility of an Assessment of Effectiveness in Respect of a Bank’S Termination of a Loan Agreement Under Art. 5 of the Civil Code
  • July 8, 2014
  • Law Firm: BSJP Brockhuis Jurczak Prusak Sp.k. - Warsaw Office
  • Pursuant to Art. 75 § 1 of Banking Law, in the event that a borrower fails to observe the terms of a loan or loses his/her creditworthiness, the bank may reduce the amount of the loan granted or give notice of termination of the loan agreement.

    The above provision gives the bank the right to reduce the amount of the loan granted or to give notice of termination of the loan agreement, where the exercise of the right under consideration is only possible in the event that at least one of two circumstances occur: the failure to observe the terms of the loan or the borrower’s loss of his/her creditworthiness. Both of the above reasons are entirely independent of each other and self-standing, which means that the occurrence of either of them allows the bank to exercise the right to give notice of termination of the loan agreement.

    The first of the above reasons, i.e. the failure to observe the terms of the loan, should be broadly interpreted as covering all instances of violation by the borrower of the provisions of the loan agreement. In turn, the latter, which consists in the borrower’s loss of his/her creditworthiness, is to be interpreted as the borrower finding himself/herself in a situation where it is not possible for him/her to repay the loan together with interest within the time limits set out under the loan agreement without assistance, where the loan agreement may additionally stipulate the criteria according to which the bank will assess the borrower’s creditworthiness and the borrower’s failure to meet them will mean the loss thereof.

    The position adopted by the Supreme Court in its judgements, starting with the judgment of 20th July 1987 (IV CR 195/87), is that: “The exercise of the bank’s right arising under a loan agreement or a provision of law to unilaterally modify the loan relationship entered into with a natural person, as well as to give notice of termination in respect of a part of or the entire loan granted, cannot be deemed to constitute abuse of the right (Art. 5 of the Civil Code), provided that the exercise thereof is effected following a determination that the failure on the borrower’s part to observe the terms set out in the agreement in respect of repayment of the loan and interest results from the debtor’s loss of his/her creditworthiness or the deterioration of his/her financial situation to a degree that puts at risk the debtor’s ability to repay the debt.”

    The above means that the assessment of effectiveness in respect of a bank’s termination of a loan agreement, irrespective of which of the above reasons is given as grounds for the termination, as well as the court’s decision as regards the granting of protection to a borrower in the form of finding such termination to be ineffective due to violation of Art. 5 of the Civil Code, will always have to involve an assessment of the borrower’s creditworthiness and an examination whether or not it has been lost. In the event that it is determined that the borrower has lost his/her creditworthiness, the bank’s exercise of its right to give notice of termination of the loan agreement cannot be deemed as effected in a manner exceeding the boundaries set out under Art. 5 of the Civil Code.

    The opinion presented in the abovementioned judgment of the Supreme Court, despite several changes and amendments to Banking Law, is consistently repeated by successive panels of the Supreme Court in cases where an assessment of effectiveness in respect of a bank’s termination of a loan agreement is carried out with regard to abuse of subjective rights.

    A similar opinion was expressed by the Supreme Court in its recent judgment of 23rd May 2013 (IV CSK 679/12), where a position was presented according to which: “It is admissible for the court to carry out an assessment of effectiveness in respect of a bank’s exercise of its competence to modify or terminate an existing legal relationship, irrespective of whether it arises under the terms of the loan agreement or an applicable legal provision, in the light of Art. 5 of the Civil Code. A violation of the terms of a loan agreement may not always justify its termination. In the event that the value of an overdue receivable is relatively low as compared to the value of the loan granted, the bank should take steps aimed at verification of the financial and economic situation of the borrower as regards his/her ability to repay the loan; the rights in this respect are provided for under Art. 74 of the act of 1997 ¿ Banking Law. In the event that it is determined that the reason for violation of the terms of a loan agreement is the borrower’s loss of his/her creditworthiness, termination of the loan agreement cannot be deemed to constitute abuse of subjective rights.”

    The Supreme Court goes even further in the judgment quoted, stating that if a bank intends to give notice of termination of a loan agreement due to the borrower’s failure to observe its terms, the bank is required to first carry out a verification of the borrower’s financial situation with a view to determine whether the borrower has lost his/her creditworthiness.

    As far as the position of the Supreme Court presented in the above judgment was met with approval on the part of consumers and the business sector, the view established among legal commentators differs from the opinion of the Supreme Court as regards the bank’s obligation to verify whether the failure to observe the terms of a loan agreement is the result of a borrower’s loss of his/her creditworthiness or whether the arrears revealed constitute evidence as to the emergence of a risk in respect of repayment of the debt.