As you might have heard this was a busy week for me, therefore I'm a bit behind with news regarding European consumer law. I'll try to catch up with most of it this weekend, though. Firstly, on the day of my PhD defense the Advocate General Trstenjak gave an opinion in the case C-453/10 concerning interpretation of provisions of two consumer directives: Directive 93/13 on unfair contract terms and Directive 2005/29 on unfair commercial practices.
The opinion is not available in English yet, but let me translate for you the most important findings thereof. It concerned a following factual situation. A Slovakian company SOS (which is not a bank) grants consumer credits on the basis of standard contract terms. A married couple Perenič took out a credit of 4979 EUR which was to be paid back in 32 monthly rates of ca 199 EUR. The 33rd monthly rate, the last one, was supposed to be equal to the loaned amount, i.e. 4979 EUR. As a result the married couple was to return 11.352 EUR. The company indicated a yearly interest rate of 48,63%, however, due to court's calculations the yearly interest rate in practice was equal to 58,76%. When they were calculating the interest rate the company didn't take into account an additional payment for granting the credit which was 83 EUR. The concluded credit agreement has a few provisions that may be deemed to be unfair towards the consumers. The married couple was in delay with payments of one of the instalments, and the company demanded payment of penalty (209 EUR) from them. The consumers then started proceedings to avoid the consumer credit contract.
The national court was questioning whether the consumer credit agreement contained unfair contract terms and what influence that would have on the binding force of the contract. The questions raised were as follows:
1. Does the aim of consumer protection of unfair contract terms directive require that the contract is declared void upon stating that it contains unfair contract terms in case such a solution would be more beneficial to a consumer?
2. Is the fact that the service provider indicates a lower than factual yearly interest rate to the consumer an unfair commercial practice based on the provisions of the unfair commercial practices directive? If it is an unfair commercial practice does it influence the binding force of the consumer contract (taking into account interests of the consumer) and the unfairness test conducted on the basis of unfair contract terms directive?
The Advocat General Trstenjak considering the first question, reminded that art. 6 of the Directive on unfair contract terms states that an unfair contract term is 'not binding' on the consumer. She reminds that this means that the provision doesn't lose its binding force for the service provider (it's voidable, and not void) (Par. 49). Furthermore, the Directive states that
"the contract shall continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair terms"
This seems to suggest that an unfairness of a contract term results only in its voidability, and the rest of the contract remains in force as long as the disproportion encumbering the consumer was removed. It has been previously argued by AG Tizzano in case Ynos (C-302/04) that this interpretation is in favour of consumers since it prevents the consumer to be bound by an unfavourable contractual term, but it doesn't protect the service provider, for whom removal of one or more contractual provisions might be disadvantageous and might raise his interest in avoidance of the whole contract. Other interpretation (automatic voidness of the whole contract) would weaken consumer protection. (Par. 50) Therefore, the Member States are not bound to proclaim the whole contract void in case of recognizing an unfair contract term within it. (Par. 51) The whole contract should be, however, declared void if it cannot exist without the avoided contract term. (Par. 52) The test whether the contract could exist without the unfair contract term could be conducted based on subjective (taking into account consumer's interests in avoiding the whole contract) or objective criteria (whether the contract is objectively still able to be performed). (Par. 54) The AG Trstenjak states that it's the objective criteria that should be applied by court. (Par. 56, 68) She bases her conclusion on the linguistic interpretation of the contract (Par. 58), since the formulation of Art. 6 suggests that avoidance of the whole contract should be exceptional. This conclusion is also supported by Art. 22 of the Directive which again seems to refer to the objective crtieria (Par. 59). Additionally, the aim of the Directive is to restore the balance between the contractual parties by removing from the contract unfair contract terms and not to avoid contracts that contain unfair contract terms. (Par. 63) According to AG Trstenjak taking into account only consumer's interests in deciding whether the whole contract should be avoided would lead to granting the consumer with a more beneficial position than the one that equal parties usually have on the market. That was not the aim of the Directive. There is no reason to release the consumer from all his contractual obligations, that he took upon himself voluntarily and while being well-informed thereabout. (Par. 65) However, pursuant to Art. 8 of the Directive, Member States may provide for more consumer protection in their national laws (minimum harmonisation). This means that Member States may also decide to proclaim the whole contract void in case it contains an unfair contract term and avoidance of the whole contract is more beneficial for consumers. (Par. 71-72)
Summing up, Member States don't have to declare the whole contract void in case it contains an unfair contract term and avoidance of the whole contract would be more beneficial to consumers, but they are free to do so.
Answering the second question, AG Trstenjak first mentions that professionally offering consumer credits is a 'commercial practice' regulated by the Directive on unfair commercial practices, since it relates to a sale of goods and services, i.e. financial services (art. 2 (d) Directive). (Par. 80) However, as AG states further Directive 2005/29 does not have any consequences as far as the binding of a contract term (and the contract itself) that might be seen as an unfair commercial practice is concerned. This might be evaluated only on the basis of Directive 93/13. (Par. 83-84) Therefore, the AG concludes that, in general, provisions of the Directive 2005/29 might not be used in the national proceedings at hand. (Par. 86) However, the AG then mentions that even if the provisions of the Directive 2005/29 may not have specific legal consequences in a given situation, they should be taken into account in interpretation of other legal acts protecting consumers, since they are interrelated, and Directive 2005/29 is in a certain way a general regulation in comparison with Directive 93/13. (Par. 88-89) Taken this into account AG Trstenjak assesses whether the fact that the service provider gave a lower estimate of a yearly interest rate than the real one to the consumer should be seen as an unfair commercial practice. The AG considers it to be a misleading commercial practice, since it influences consumer's decision to conclude a contract by giving him false information regarding an essential contractual element. (Par. 96) The average consumer is perceived as collecting offers of many potential credit providers and as making a decision on with whom to conclude a credit agreement based on comparison of their offers, including costs involved therewith. (Par. 99) The yearly interest rate should be seen as part of the contract's price. (Par. 97) As a result, the real amount of the yearly interest rate should be seen as an essential information when concluding a credit contract without which a consumer would usually not be able to take a reasonable transactional decision. Misleading him as to this information has to act as to his detriment. (Par. 101) Therefore, it should be considered to be an unfair commercial practice. (Par. 103) It doesn't matter either whether the service provider acted with due professional diligence when calculating the yearly interest rate. (Par. 106) The fact that misleading information given in the contract constitutes an unfair commercial practice doesn't automatically lead to a conclusion that such a contractual provision is an unfair contract term. To the contrary, the general unfairness test still needs to be conducted. (Par. 121, 125-126) However, the fact that there has been an unfair commercial practice recognized may be taken into account when assessing unfairness, based on art. 4 of the Directive 93/13 according to which all circumstances attending the conclusion of the contract are to be taken into account. (Par. 123-125)
Summing up, indicating in a consumer credit contract a yearly interest rate that is lower than the factual one constitutes an unfair commercial practice. It doesn't automatically mean that such a provision in the contract should be considered unfair, but this assessment should be taken into account by the national court when it conducts the unfairness test (as a circumstance attending the conclusion of the contract).