Monday, 13 July 2015

Modification or execution of the contract? Price indexation terms before the Court of Justice (AG opinion in C‑326/14)

While legislative harmonisation of private law in Europe has seemingly been put on hold for the time being, existing European measures do not cease to bring "irritations" into the subject and its vocabulary. 
Last week, for instance, AG Cruz Villalon was confronted with the question of what entails a contractual modification under Directive 2002/22 CE, or the Universal Service Directive (here, USD), and in particular its article 20(2), according to which when a modification of contractual conditions occurs, users must be entitled to terminate the contract with no penalties attached. 

The question in Verein fuer Konsumenteninformation (here, the VK) v A1 Telekom Austria AG, the case we will be discussing here, concerned an indexation clause- a term stating that the provider may increase the service price on the basis of the consumer price index variations as determined by an Austrian statistics institute. 

In short: the AG concluded that a price indexation clause should not be seen as allowing a contractual modification- and thus should not be accompanied by the possibility for the consumer to terminate the contract- where the said clause complies with requirements of foreseeabilitytransparency and legal certainty (see first para 37) such as to ensure (para 41) that that they do not in concreto modify the contract, but rather uphold the original balance.

Want to know/understand more? Read below.

The VK claimed that, under article 20(2) of the USDe, such a term should only be allowed if accompanied by a clause allowing the user to terminate the contract when a price increase was actually adopted. This is plainly the case when other kinds of adaptation clauses are included in a contract, such as clauses allowing the provider to unilaterally recalculate the price in certain situations. 
The company, on the other hand, put forward (para 21) that a price increase based on an indexing clause should not be considered as a contractual modification. The Commission endorsed this last view, adding that in this specifc case the possible variations were clearly outlined, objective and linked to an evaluation performed by an independent third party (the statistics institute).

From the legal point of view, as mentioned above, the question is how to interpret the notion of contractual modification to the ends of the USD. In other words, the question is: 
does a price increase occurring under an indexation clause represent a modification of the contract, or merely execution thereof? 

The AG, after having considered two alternative options, essentially opts for a self-standing interpretation of the concept "contractual modification" for the ends of article 20(2) USD. Let's see how. 

First, he considered whether the Unfair Terms Directive (UTD), which devotes ample attention to indexation terms, should be used as an interpretive tool. According to the AG, although the Directive can be seen to express a certain favor of the European legislator for indexation clauses, the interpretation of article 20(2) cannot be based on the UTD because that Directive only has something to say as to whether certain terms are (to be considered) fair, not on the legal nature of actions undertaken under such terms (see paras 29-30).

Having this cleared, the AG (para 35) looks into the text's plain wording. Prima facie, he says, the notion "modification to the contractual conditions" does not include a price increase deriving from the application of contractual terms. However, he goes on, such literal interpretation would deprive article 20(2) of any meaningful bite, since it would make it possible for variation clauses to deprive users of the right of termination that the provision intends to grant them. 

Thus, the concept has to be interpreted autonomously in the context of the USD. In this context, the price indexation clause should not be seen as entailing a contractual modification where the said clause complies with requirements of foreseeability, transparency and legal certainty (see first para 37) such as to ensure (para 41) that that they do not in concreto modify the contract, but rather uphold the original balance. The foreseeability prong entails that the index used should be determined by a third, independent party on the basis of objective criteria. 

In a turn that is not surprising in this context, the AG (para 40 and 45) asserts that it is for national judges to decide whether a specific term fullfils the conditions above; only in this case, should it be seen as capable of allowing price variations to take place without any contract modification in the sense of article 20(2). 

From a technical point of view, the conclusion might be dubious: how can the "transparency" of a per se valid term determine the legal nature of following actions undertaken under that term? And how exactly did the advocate general come up with the requirements of foreseeability, transparency and legal certainty (as operationalisation of "upholding of the original balance")? However, it seems that in its core the conclusion makes sense. Whether the Court will share this view, and possibly find a better way to argue it, will only be known in a few months...

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