21/10/2026

The Supreme Court has upheld Bank of Ireland’s contractual power to change an interest reference rate, clarifying the scope and limits of unilateral variation clauses for commercial lending.

Key takeaways

  • The Supreme Court upheld the decisions of the High Court and Court of Appeal and dismissed the appeal
  • Unilateral variation clauses in commercial lending agreements require clear words and strict interpretation
  • The relevant clause at issue in the case gave Bank of Ireland a wide power to alter the method of calculating the interest rate and the interest rate
  • The change by Bank of Ireland in 2011 of one of the component elements of the interest formula came within the scope of the agreed terms
  • The Supreme Court, however, noted that the “absolute” nature of the discretion could not be exercised in an arbitrary or manifestly unreasonable manner (which had not been suggested in this case)

What has the Supreme Court decided?

In Harte v The Governor and Company of the Bank of Ireland [2026] IESC 44, the Supreme Court upheld the entitlement of Bank of Ireland (the “Bank”) to replace EURIBOR with its Bank Cost of Funds (“BCOF”) reference rate under the relevant loan terms. In a unanimous judgment delivered by Hogan J. on 20 October 2026, the Supreme Court dismissed the borrowers’ appeal, upholding the outcome in the High Court and Court of Appeal.

Arthur Cox represented Bank of Ireland in the proceedings.

Background to the dispute

The borrowers obtained two loans totalling €15 million in 2009 for an industrial development in Rathcoole, Co Dublin. The original interest structure used EURIBOR as its reference rate. Following loss of access to wholesale funding markets, the Bank notified the borrowers in October 2011 that it would move to BCOF. The loans were repaid in 2017.

The borrowers claimed approximately €738,440 that they had paid in additional interest, arguing that the change was not permitted by the terms of the loan agreement. The Supreme Court appeal was limited to the interpretation of the final paragraph of clause 5 of the Bank’s standard terms, rather than debt recovery or repossession.

Why did the variation clause permit the change?

Clause 5 permitted the bank to change both “the method for calculating interest” and “the interest rate” at the Bank’s “absolute discretion”, “whether to take account of a change in prevailing market conventions in Ireland or otherwise”. It also required one month’s prior notice.

In rejecting the borrowers’ arguments, the Court confirmed two important points:

  • The power extended to changing a reference rate. Replacing a component of the interest formula fell within the ordinary meaning of changing the “method for calculating interest”. The Court rejected the borrowers’ suggested distinction between changing the formula and changing its constituent elements.
  • A change in market conventions was not a prerequisite. The words “whether” and “or otherwise” made that reference illustrative, not restrictive. Although no change in market conventions had occurred, this did not prevent the Bank from exercising the power.

The Court held that the contra proferentem principle, which ordinarily resolves genuine ambiguity against the party putting forward the term, was not engaged. The wording did not reasonably bear the borrowers’ proposed interpretation, leaving no residual ambiguity for the principle to resolve.

“Absolute discretion” is not an unrestricted power

The decision is not a general endorsement of unrestricted unilateral variation. The Court emphasised that clear words are required where a standard-form contract allows a dominant contracting party to alter a fundamental feature of the bargain. Such clauses must be construed strictly, but that does not permit courts to rewrite clear contractual language.

Although clause 5 conferred a wide variation power, describing the Bank’s discretion as “absolute” did not make it unrestricted. The Court confirmed that an arbitrary or manifestly unreasonable exercise of that power could attract judicial intervention. No such exercise was alleged in this case.

The Court also stressed that a commercially reasonable decision would not cure the absence of contractual authority. The existence of the power and the manner of its exercise are separate questions.

The information in this summary is provided for general information purposes only and does not constitute legal advice.