Friday, 22 March 2013

Mandatory statutory or regulatory rules on what? (RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen e.V.,)

Yesterday, the Court of Justice delivered an important and complex judgement on (unfair) general terms and conditions in a very special sector, namely that of gas supply. 

The post which this decision originated is *very* long, so for less adventurous readers here is a synthesis of the decision's two main points:

1) providers which choose to supply gas under a "free market" regime can not automatically adopt the same contract terms that they are authorised to use under regulated tariff regime, since different market conditions demand (or can demand) different balancing exercised; even provisions of law, taken out of their original context, can lose their immunity under Directive 93/13;

2) in long-term services, it is normal that prices will be amended over time and that the provider reserves to do so; however,
a) to comply with European law in the field of gas supply, the conditions under which changes will take place need to be made clear in the contract;
b) customers must be given an effective right to terminate the contract if they do not want to accept price variations; in particular, the fact that they are contractually entitled to do so is not sufficient when factual conditions (not idiosyncratic to the consumer) make the termination impossible.

 For hard core fans of unfair terms control, however, here is the unabriged version

As many will know, energy is very often (or used to be) supplied outside a pure freedom-of-contract regime, with universal service obligations and other special rules. In the case considered by the Court in
RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen e.V., however, the parties had concluded a "special contract", exempt from administrative tariff regulation. The provider, nonetheless, had chosen to reproduce in the contracts which it supplied to its customers some terms used in its regulated contracts- in particular, those on price increases. 
The incorporated terms referred to the applicable (to non-special contracts) legislation, which "allowed the supplier to vary gas prices unilaterally without stating the grounds, conditions or scope of the variation, while ensuring, however, that customers would be informed of the variation and would if appropriate be free to terminate the contract." (par. 18)

In other words, from a formal point of view the contract made legal rules on standard tariff contracts applicable to non-standard tariff ones. From a substantive point of view, the terms allowed the provider to increase its prices with no restrictions, provided that the customers would be duly notified and authorised to terminate their subscription. 

After a consumer organisation brought before German courts a request that the concerned consumers be reimbursed of the amounts paid as a consequence of four price increases implemented within 26 months, the terms just mentioned came to be investigated by the German Supreme Court in civil matters, the Bundesgerichtshof, which raised two questions:

1) whether the terms are subject to scrutiny under the Unfair Terms Directive (93/13 EEC);
2) whether, were the Directive applicable, terms which allow a supplier to change the price of the good/service without determining "the grounds, conditions and scope of a change"can still be considered fair if the customers are duly informed of the variation when it takes place and given a right to terminate the contract.
Both questions are extremely interesting in the context of unfair terms control. 

As concerns question number one, Directive 93/13 excludes from its scope (art. 1(2)) all terms "which reflect mandatory statutory or regulatory provisions". We have seen that the terms included in the contract reproduced legal provisions, though not directly applicable to the contracts concerned. Should this operation guarantee immunity from control? According to the court, the answer is no. 
The rule's underlying assumption is that "it may legitimately be supposed that the national legislature struck a balance between all the rights and obligations of the parties to certain contracts." (par 28); on the other hand, when certain rules have been made applicable to one group of contracts, "[a]n intention of the parties to extend the application of those rules to a different contract cannot be equated to the establishment by the national legislature of a balance between all the rights and obligations of the parties to the contract" (par. 29), and does not deserve the same deference. Affirming this principle is necessary to avoid providing suppliers a "safe heaven" made of patchwork application of rules conceived for different domains than the one concerned (par. 31).
In this case, it was clear that German law had deliberately subjected "special" contracts to a different regime compared to standard tariffs, so the equilibria found in the latter context could not be simply transposed to the former (par. 37)

Coming to the second question, the Court first reaffirms that it is not within its competence to decide on the unfairness of specific terms.What it can do, though, is provide the referring court with guidelines to evaluate the terms in light of the concrete circumstances. In the context of gas supply, the evaluation has to take into account the high standards set by Directive 2003/55, which requires Member States to "adopt measures to ensure that those terms and conditions are fair and transparent, are stated in clear and comprehensible language and are notified to consumers before the contract is concluded, and that consumers receive transparent information on applicable prices and tariffs and on standard terms and conditions." (par. 45)

In particular, while the suppliers are not required by any legal rule to justify the adoption of a price increase, courts should ascertain two elements. The first concerns the agreement itself; concerned courts should check "whether the contract sets out in transparent fashion the reason for and method of the variation of the charges for the service to be provided, so that the consumer can foresee, on the basis of clear, intelligible criteria, the alterations that may be made to those charges" (par. 49). 
The obligation to give notice in due time of the change (and the related termination right) is additional to the duty to correctly inform the consumer about the terms and conditions under which the service is provided and can in principle not compensate deficiencies in the transparency of the original agreement (par 51-52). 

The other fundamental component of the evaluation is that "consumers [must] have the right to terminate the contract if the charges are in fact altered". In particular, "it is of fundamental importance [...] that the right of termination given to the consumer is not purely formal but can actually be exercised" (par. 54). This requires courts to take into account market conditions, termination costs and other possible factors which may hinder the realisation of the consumer's right to terminate. 

... in other words, it seems to this author that the Court is implying that the terms might, indeed, be unfair. What do you, esteemed readers, think?

What seems sure is that the German Government (and, indeed, the gas company) will not be enthusiastic about this judgement. To this respect, it might not help that they both had asked the Court, should the terms be found not to "satisfy the requirements of European Union law" (par 56), postpone the effects of the judgement by 20 months to avoid the financial costs of a "retroactive" unfairness declaration. The Court denied the request by considering that the terms unfairness will not descend of its decision, but of the national court's findings. The hot potato is thus in the hands of the Bundesgerichtshof, but the impact of the case might go well beyond the German boundaries.

P.S. meanwhile, BEUC's twitter account announced the decision as a "milestone".


  1. I'm not sure how to read par. 54.

    It looks that the Court assumes, that in a particular market conditions, where "the consumer has no real possibility of changing supplier", the supplier is deprived from his right alter the charge for its service, notwithstanding the fact of legitimate interest.

    How do you think, am I right?

  2. Hello, thanks for the interesting question and sorry for the delay.
    Concerning par 54, first of all I would "weigh" it carefully since, all in all, it does not make part of the decisum and the court might have been less careful in formulating it then it would otherwise have been.
    That said, the decision refers to par 85 of the AG's opinion. There we read that in the case at stake "it may be inferred [...] that there was no such actually existing right of termination, and no obligation of the trader to give notice of the price increase in sufficiently good time for the consumer to be able to weigh up possible alternatives."
    Lack of competition in the gas sector, according to the AG, combined with the absence of a sufficient "period for consideration", made the possibility of terminating the contract much more evanescent than the Directive would require.
    At the same time, together with the reference to the Court's decision in Invitel, this was mainly used as an argument to reinforce the finding that the right to terminate the contract could not remedy a lack of transparency.
    As to the possibility to effect a price increase (foreseen by a transparent term) when no effective right of termination exists, I think it is reasonable to think that the right is not pre-empted, but its exercise might be subject to stricter scrutiny than in "flexible" contexts. In other words, in this scenario the company might be required to only foresee- or only exercise- price increases when, in your words, a legitimate interest can be shown. Does this make sense to you?