Tuesday, 14 February 2012

Unfair terms in consumer credit agreements - AG of the CJEU in Camino (case C-618/10)

14 February 2012: AG Trstenjak gave her opinion in the case C-618/10 (Banco Español de Crédito v. Joaquín Calderón Camino)

This case concerned an unfair contract term that constituted a part of a consumer credit agreement. In May 2007 Mr Camino concluded a loan agreement with a Spanish bank for the sum of EUR 30.000. He intended to purchase a vehicle for that amount. The loan was terminated early since the consumer did not timely make all of the agreed repayments. The bank started proceedings in the Spanish courts claiming repayment of the loaned amount plus interest and costs. One of the contractual terms set the rate of interest on late payments at 29%. The Spanish court of first instance considered (of its own motion) that term unfair, and therefore void, and decided to replace that contractual term by another one - fixing the rate of interest at 19% instead. The bank objected to this verdict by claiming that the national court may not raise of its own motion such an issue at the beginning of the procedure, where no motions were made concerning it. The main questions asked to the CJEU are therefore: 

1. Does a national court have authority to assess of its own motion unfairness of a term concerning interest on late payments in consumer credit agreements in limine litis or at any stage during the proceedings for an order for payment or should it wait for an objection of a consumer to the application of such a term? 

2. Does art. 6 (1) of the Unfair Contract Terms Directive which states that an unfair term 'shall not be binding on the consumer' grant a power to national courts to replace a contractual term which has been established to be unfair by another term which is not regarded as unfair?

Question 1

As far as the first question is concerned, it is important to mention that the procedure for an order for payment has been formalized and harmonized in Member States with the goal to make it simpler, quicker and more effective for contractual parties. Therefore, allowing national courts to conduct assessment of unfairness of contractual terms in these proceedings of their own motion could be seen as going against this goal, since it would require a thorough assessment of contractual rights and obligations (lengthening the procedure). As the AG mentions:

"If the Court should accept the existence of such an obligation under EU law, this would ultimately mean that the national legislature would be forced to made comprehensive modifications to its law of civil procedure in order to comply with the rules of EU law. At the same time, however, it would have to ensure that the national order for payment procedure does not lose its efficiency and is retained as an instrument for simple, low-cost enforcement." (Par. 27)

The AG considers the judgement given by the CJEU in the Pénzügyi case, in which the CJEU put an obligation on national courts to investigate whether there is an unfair term in the contract, even if national procedural rules permit that only if the parties so request. (Par. 32-33) However, the AG does not think that this rule should be applied to the case at hand, which concerns the order for payment procedure. (Par. 34) The AG differentiates these two cases based on the phase of proceedings that they were in. In the Pénzügyi case the consumer appealed from the order for payment procedure, initiating the declaratory judgement procedure. In the Camino case the court assessed of its own motion the unfairness in the order for payment procedure, to which pursuant to the AG the Pénzügyi case does not apply. (Par. 36) Another difference between these two cases was as to the type of contractual term that was being assessed (in Pénzügyi case - term conferring jurisdiction; in Camino case - term concerning interest on late payments). (Par. 40)

"(...) jurisdiction agreements must in principle be distinguished from terms which lay down substantive contractual obligations. A distinguishing feature of the latter is that they often contain detailed terms which are binding on the contracting parties and whose incompatibility with the requirement of good faith cannot always be determined prima facie, not least because of their complexity. Rather, such a finding often requires a thorough assessment by the national court having regard to all the circumstances of the individual case." (Par. 41)

Therefore, while a national court knows without doubt that it is dealing with an unfair contractual term when it is assessing a term conferring jurisdiction, the same cannot be said for other substantive contractual terms (like the one on interest on late payments). In the first case, a national court does not have to conduct thorough assessment of unfairness (prolonging the procedure), in the second one - it does. (Par. 45-46) A need to conduct such a thorough assessment would negatively influence efficiency of a national order for payment procedure, that is quick enforcement of uncontested pecuniary claims. (Par. 49, 52-53) Moreover, it does not seem that by refusing to conduct the test of unfairness in such proceedings the principles of equivalence and effectiveness would be infringed. (Par. 65, 73-74)

"(...) it is possible to concur with the unanimously held view of all the parties, that it appears sufficient, in order to ensure that consumers are protected against claims based on unfair contractual terms, if, as is generally envisaged in a national order for payment procedure, the consumer in respect of whom an application for an order for payment has been made is given the opportunity to make a legal challenge by bringing an appeal." (Par. 74)

harmonization character of the Directive, Member States may put an obligation on their national courts to conduct such an assessment during the order for payment procedure.

Question 2:

The AG takes into account literal interpretation of Article 6(1) as well as its purpose. The text of the Directive does not mention a possibility of 'replacement' of unfair terms. The only legal consequences of unfairness is the fact that such a term is 'not binding'. Since this rule is mandatory, that means that no derogations thereof are permitted. (Par. 84) Moreover, text of the Directive states that the contract continues to bind the parties if it is capable of continuing in existence without the unfair terms. 

"Article 6(1) of the directive must therefore be understood to mean that, after the unfair terms have been removed, the contract must continue in existence in unmodified form as to the remaining terms, if that is legally possible, which notionally precludes any replacement of terms or modification of the contract." (Par. 85)

Moreover, while the short-term purpose of Article 6(1) is to prevent consumers remaining to be bound by unfair contract terms, the long-term purpose is to prevent continued use of unfair terms in commercial practices. (Par. 86) The AG justly notices that if replacement of unfair contract terms by national courts was allowed, that would significantly diminish the deterrent effect of the unfair contract terms regulation. 

"Whilst the seller or supplier possibly has grounds to fear that, by virtue of a finding that a term is not binding, he will continue to be bound by an agreement which may be less favourable for him, a modification along the lines described above ultimately results in the terms of the agreement being modified in accordance with the law and thus to a state which is acceptable to the seller or supplier. (...) the seller or supplier may ultimately feel provoked by such a legal situation, especially since he would have nothing to lose by attempting to impose his terms on the consumer. " (Par. 88)

Answer: Article 6(1) of the Directive does not allow for national courts to modify a consumer agreement so as to replace an unfair contractual term by another term which is not regarded as unfair.

It is a very interesting opinion, especially the second answer given by the AG, if it is upheld by the CJEU, may lead to changes in many national laws (since at the moment in many Member States judges tend to replace unfair contract terms by not unfair contract terms instead of removing them from the contract).

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