Wednesday, 26 September 2018

"Eat ORIGINal! Unmask your food" initiative

With the introduction of the Lisbon Treaty EU citizens' empowerment increased due the setting up of the European Citizens' Initiatives. One such initiative has been registered this month - "Eat ORIGINal! Unmask your food". The goal thereof is to ensure that all food products have a mandatory declaration of origin. This could not only better inform consumers on their food products' choices but also aims to protect their health and prevent fraud. The registration of this Initiative is to take place on October 2nd. This will be followed by collection of signatures in support of this project - 1 million is necessary within a year, from at least seven different Member States. If this threshold is achieved then the Commission will need to react to the Initiative. 

More information on this initiative will be available as of Ocobter 2nd! (through these links)

Airbnb to unroll the transparency carpet for its users

Whilst the Court of Justice was keeping us busy this month, it is worth it to mention that Airbnb finally committed to adjusting its T&Cs in accordance with EU law (Airbnb commits to complying with European Commission and EU consumer authorities' demands). This follows the earlier action of the CPC Network and of the Commission against Airbnb that we reported on previously (EU Commission cracks down on Airbnb to comply with EU consumer protection). Apparently, they will change its policies by the end of this year ensuring, among other things, price transparency. This should follow from Airbnb presenting consumers with the total price of bookings, including extra fees (cleaning charges e.g.) or warning them explicitly that extra fees may apply, when it is impossible to calculate these in advance. Other terms that shall be amended refer to clearly informing consumers about the remedies available to them both against hosts and Airbnb, and that they may sue Airbnb in courts of their country of residence. In case of a contract's termination or Airbnb removing content from its website, they will inform consumers about this and allow them to appeal this decision as well as claim appropriate compensation.
An interesting commitment is for Airbnb to clearly identify whether the accommodation is offered by a consumer or a professional party. Considering that different rules apply in B2C and B2B cases, it is important for consumers to know who their counterpart is. However, it may not always be easy to determine the professional character of the host, as this will depend on the applicable national laws, as well as transparency in dealings between the server and the hosts. It will be interesting to observe what solutions Airbnb adopts in this respect. Whether e.g. they will rely on the self-declared private/professional party character of the host. 
If any of our readers are hosts with Airbnb, we would appreciate being informed about any notifications you may receive in the coming months as to the changes in the new policies and new obligations placed on you.

Monday, 24 September 2018

National courts are not obliged to review unfair practices during mortgage enforcement proceedings - CJEU in Bankia

On 19th September 2018, the ECJ issued its ruling on the Bankia case (Case C‑109/17). The case concerned the application of the Unfair Commercial Practices Directive in mortgage enforcement proceedings and gave the Court the opportunity to comment on the different mechanisms used by the Unfair Commercial Practices Directive and the Unfair Contract Terms Directive (hereafter UCPD and UCTD respectively).
This blog has previously covered also the AG opinion on this case. You can find the previous post here.

Facts of the case
In 2006 Mr Marí Merino, Mr Gavilán and Ms Marí Merino took out a loan with Bankia secured by a mortgage in respect of a capital of EUR 166 000, repayable over a 25-year period. That agreement set the amount of the ‘starting price’ of the mortgaged property at EUR 195 900.
In 2013,  after a second novation, the amount of the starting price of the property was reduced to EUR 57 689 and the period for repayment of the outstanding loan capital of EUR 102 750 was extended to 40 years. In addition, the extrajudicial sale of the property was authorised and the agreement now states that that property is the habitual residence of Mr Marí Merino, Mr Gavilán and Ms Marí Merino.
Bankia used that novated loan agreement secured by a mortgage to initiate mortgage enforcement proceedings. Mr Marí Merino, Mr Gavilán and Ms Marí Merino lodged an objection to those proceedings claiming that the agreement contained unfair terms. First, the amount of the starting price was reduced to their detriment, with the extension of the period for repayment being merely a means of inducing the borrowers to accept the novation of the agreement. 
Furthermore, they argued that Bankia acted in a way that was contrary to the requirements of professional diligence inasmuch as it took advantage of restructuring the debt in order to alter the valuation of the property in question, meaning that Bankia employed an unfair practice.
Finally, Bankia was not adhering to the Code of Good Banking Practice, by which it is bound, by not allowing the borrowers to discharge the debt by giving the property in payment while remaining there as tenants, even though they satisfied the conditions set in the Code for doing so. 

Questions referred
The following questions were referred to the ECJ:
1)    Must Directive 2005/29 be interpreted as meaning that national legislation such as that currently regulating Spanish mortgage enforcement — Article 695 et seq. in conjunction with Article 552(1) of the [Law of Civil Procedure] — which does not provide for the review by the courts, of their own motion or at the request of one of the parties, of unfair commercial practices, is contrary to Article 11 of that directive because that national legislation hinders or prevents review by the courts of contracts or acts which may contain unfair commercial practices?
(     2)    Must Directive 2005/29 be interpreted as meaning that national legislation such as the Spanish law which does not ensure actual compliance with the code of conduct if the party seeking enforcement of a debt decides not to apply that code (Articles 5 and 6 of Royal Decree-Law No 6 of 9 March 2012, read in conjunction with Article 15 thereof) is contrary to Article 11 of that directive?
(     3)    Must Article 11 of Directive 2005/29 be interpreted as precluding Spanish national legislation which does not allow a consumer, during mortgage enforcement proceedings, to request compliance with a code of conduct, in particular as regards the giving of a property in payment and extinguishment of the debt — Point 3 of the Annex to Royal Decree-Law No 6 of 9 March 2012, Code of Good [Banking] Practice?’

Review of unfair practices in mortgage enforcement proceedings
The first question is asking whether national law which prohibits the review of unfair commercial practices is contrary to art. 11 UCPD. The Court pointed out that the UCPD prohibits unfair practices, but leaves it to the discretion of the Member States to decide what measures to use to combat unfair practices. Such national measures need to be adequate and effective and that the penalties thus laid down are effective, proportionate and dissuasive (para 31). Furthermore, the Court underlines that the UCPD is without prejudice to national contract law and individual legal action, as set out in art. 3(2) UCPD.
Therefore, the ECJ found that it is not necessary for national courts during mortgage enforcement proceedings to be able to review whether the enforceable instrument breaches the UCPD, as the UCPD does not place such an obligation on the Member States (para 34).
The Court elaborates on the differences between the well-known Aziz case, also concerning mortgage enforcement proceedings in Spain and the present one, as well as the differences between UCTD and UCPD. It states that both the UCTD and the UCPD aim to ensure a high level of protection; however, each one pursues that objective using different means (para 36).
The reasoning put forward by the Court is that the UCTD clearly sets out in art.6 UCTD that unfair terms are not to be binding on the consumer, while the UCPD merely prohibits unfair practices (paras 37, 41). The UCTD seeks to address the inequality of power between the parties which is created by the unfair term, while the UCPD only seeks to put an end to unfair practices, without an impact on the validity of the contract. 
Contrary to Aziz, where compensatory protection was found to not meet the requirements of art. 7(1) UCTD, in the case of unfair practices, compensatory protection can be sufficient (paras 45-46). Still, the Court clarifies that it is possible for the unfairness of practices to be considered during mortgage enforcement proceedings in the context of review of unfair terms. As established in Pereničová and Perenic the finding of an unfair practice doesn't have a direct effect on the validity of the contract (paras 49-50).
For the first question, the court agrees with the AG opinion that the answer to the first question should be negative.

Codes of Conduct
The second and third questions referred to codes of conduct, and whether national law which does not confer a legally binding nature to a code of conduct is contrary to art. 10 UCPD. The Court notes that it is not up to them to establish whether the Code in question falls under the definition of code in art. 2(f) UCPD.
The court stated that even though non compliance with a code may constitute an unfair practice, the UCPD does not require for the Member States to provide for direct consequences when the traders do not adhere to the code they subscribed to (para 58). This decision undermines the effect of codes of conduct, if traders face no consequences when they do not adhere to them. More precisely, it transfers that responsibility to the Member States, even though the UCPD is a maximum harmonisation directive and intended to strengthen the relevance of codes of conduct.
This judgement appears to weaken the importance of the UCPD, making it clear that it is less able to protect individual consumers than the Unfair Contract Terms Directive. While the judgement is firmly based in the letter of the law, it shows the resulting gaps in protection and the need for individual remedies for the UCPD, in order to achieve the proposed aim of a high level of consumer protection.

The limits of disclosure duties under the CRD (and what "vulnerable consumers" have to do with it) - AG opinion in C-430/17 Walbusch Walter Busch

Last Thursday, Advocate-General Tanchev delivered an opinion in case C-430/17 Walbusch Walter Busch. The opinion is a part of an on-going preliminary reference procedure in which the Court of Justice is asked to clarify the notion of “a means of distance communication which allows limited space or time to display the information” used in Article 8(4) of Directive 2011/83/EU on consumer rights (CRD).

Facts of the case and the key question

The case involved a trader who distributed an advertising leaflet as a supplement to newspapers and magazines. The leaflet did not merely promote trader’s products, but also allowed consumers to submit binding orders through an attached coupon. The existence of the mail order coupon triggered the applicability of Directive 2011/83/EU, which, among others, defines items of information to be communicated to consumers prior to the conclusion of a distance contract. The dispute in the case at hand concerned the exact scope of this disclosure duty; more precisely, whether the trader who distributed the relevant coupon was obliged to provide all information under Article 6(1) of Directive 2011/83/EU on the disputed leaflet/coupon or rather benefited from a milder regime of Article 8(4). The key question was, in other words, whether a coupon attached to an advertising leaflet amounted to “a means of distance communication which allowed limited space or time to display the information”, in which case the trader would only be obliged to provide information regarding the main characteristics of the goods or services, his own identity, the total price, the right of withdrawal, the duration of the contract and, if applicable, the conditions for its termination. Should this be the case, the Court was asked to provide further guidance as regards the reach of the “information about the right of withdrawal” laid down in Article 8(4): 1) whether the relevant obligation covered only the existence or also the conditions of the right to withdraw; and 2) whether it involved a duty to attach a model withdrawal form set out in Annex I B to the Directive.

Two interpretations

During the proceedings two main lines of interpretation emerged. The first one, supported by the plaintiff (Zentrale zur Bekämpfung unlauteren Wettbewerbs, a German self-regulatory organisation promoting fair competition), the Commission and two of the intervening states (Finland and Poland), denied the leaflet in issue the quality of a “means of distance communication which allowed limited space or time to display the information”. Advocates of this reading believed that it is the abstract nature of the means of distance communication (whether or not it was subject to particular technical constraints - this not being the case for conventional paper leaflets), and not the concrete form of communication chosen by the trader (e.g. a smaller or a bigger leaflet), that plays a role in assessing the applicability of Article 8(4). The reading, arguably, provided a higher degree of consumer protection and remained in line with the requirement for exceptions to be interpreted strictly.

Nevertheless, this was not the only reading of the Directive put forward as part of the proceedings. A different interpretation was proposed by Germany, which argued that it was possible to read the CRD in a way that safeguarded the traders’ freedom to advertise without undermining a high level of consumer protection. In order to achieve this result, in assessing the applicability of Article 8(4), preference was to be given to the subjective form of communication chosen by the trader, rather than the objective criteria. Therefore, according to this view, in a situation such as the one in the main proceedings, the trader should only be obliged to include a limited set of pre-contractual information on the leaflet/coupon itself. This would be without prejudice to a high level of consumer protection, which would still be ensured by other provisions of the CRD. Most notably, pursuant to Article 8(4) in fine, the trader would be required to provide the remaining information “in an appropriate way” (e.g. on a website). On top of this, as this reading appears to suggest, pursuant to Article 8(7)(a), the trader would be required to communicate detailed information (including on the right of withdrawal) in a confirmation of the contract delivered on a durable medium, at the latest at the time of delivery.

Opinion of Advocate-General

The Advocate-General was more convinced by the first of the described lines of reasoning and considered that the leaflet in question should fall under the full disclosure duty of Article 6(1) CRD. In forming his opinion the AG relied on several arguments related, among others, to the wording (“technical constraints of certain media” in recital 36; para. 63) and context (if Article 8(7)(a) was to be interpreted as Germany suggests, Article 8(4) would be superfluous; para. 80) of the interpreted act. Perhaps most interesting was, nevertheless, the contrast between Advocate-General's and Germany's views as regards an intepretation which best reflects the CRD's objectives. It is in this context that arguments related to the protection of (vulnerable) consumers, on the one hand, and traders’ freedom to conduct a business, on the other, were raised.

Most notably, the AG Tanchev disagreed with the opinion of Germany that the imposition of a full disclosure duty at the pre-contractual stage would restrict “freedom of traders to conduct a business under Article 16 of the Charter without supplying any advantage to consumers” (para. 47). Instead, he expressed a conviction that such an added value existed, and particularly so with respect to the protection of vulnerable consumers. Considering that the AG's reasoning is a rare (if not the first) occasion when recital 34 of the CRD acquired practical importance, the following two passages of the opinion are worth quoting in full:

73. Finally, as argued by the plaintiff, advertising media produced in traditional forms of communications, as is the case in the main proceedings, are often directed at societal groups, such as older people, who are unaccustomed to going to the internet to acquire access to the supplementary terms of the contract proposed.

74.  Recital 34 of Directive 2011/83 reflects protection of such groups as an aim of that directive. Its second sentence states that ‘the trader should take into account the specific needs of consumers who are particularly vulnerable because of their mental, physical or psychological infirmity, age or credulity in a way which the trader could reasonably be expected to foresee.’ This context too points toward rejection of the trader’s selection of design and medium in determining whether ‘a means of distance communication … allows limited space or time to display the information’ under Article 8(4) of Directive 2011/83, binding as it would all societal groups to engage with the internet to secure information traders are bound to provide pursuant to Article 6(1) of Directive 2011/83.

It remains to be seen whether the Court of Justice agrees with the interpretation of its advisor. While there is no doubt that the AG was driven by the objective to afford consumers a high level of protection, the opinion might be criticised for failing to engage with the consumer-oriented arguments supporting an alternative reading. Germany's view that a full disclosure duty at the pre-contractual stage may not be in consumers' best interests, considering that "realistically, it cannot be excluded that many consumers do not keep advertising leaflets after they place their orders" (para. 46), was perhaps too easily dismissed. All in all, resolution of the specific issue under dispute here may not be the most interesting part of the upcoming judgment. What deserves even closer attention are the specifics of the Court's argumentation, especially its position on (the need for and conditions of) the balancing between particular rights and freedoms as well as possible references to recital 34.

Friday, 21 September 2018

CJEU on equivalence as to consumer associations' intervention in individual proceedings (C-448/17)

One of the latest instalments in unfair terms adjudication was delivered yesterday by the Court of Justice in case C-448/17 (EOS KSI Slovensko), concerning a Slovak consumer who had concluded a consumer credit contract. 

In this case, the most prominent substantive problem with the contract itself was that it did not mention the APR. Only a mathematical formula was provided, with no further information that would allow the consumer to calculate the applicable rate. 

The creditor - a debt recovery company - sought an order for payment, which was granted though a procedure taking place on the basis of documental evidence, without a hearing. Under Slovakian law, this procedure involved not a judge but a civil clerk. Once the order was granted, without any assessment being carried out under unfair terms rules, nor consideration being given to the lack of APR, the consumer had 15 days to file their opposition. This, in turn, required an indication of substantive reasons for opposing enforcement. 

Intervention by an interested consumer association was rejected in follow-up proceedings on the basis of the fact that previous action by the consumer was required before other interested parties could intervene - in other words, the association could intervene in a case that was already pending thanks to the consumer's action, but not initiate a new case. 

A Slovak court took stakes with a number of issues in the scenario above: 

First, it asked whether it was open to Slovak law to restrict the possibility for interventions by consumer associations in the way it did, in particular in light of the fact that for claims regulated entirely by "Slovak" (vis à vis "European") law the criteria for considering a case to be pending are looser than in cases where EU consumer law plays a role. 

The Court of Justice answered this question by, on the one hand, re-affirming that article 7 of the UCTD does not require member states to allow consumer associations to intervene in individual proceedings (para 41 - no problems, thus, on the effectiveness front); on the other hand, the Court recalls, in these cases the member states are anyhow bound by the principles of effectiveness and equivalence. In particular, the latter principle precludes a national legislation which sets different pendency requirements for purely "national" cases and cases connected to EU (consumer) law. Thus, should the national court indeed find the existence of one such difference here, the stricter pendency rule would be incompatible with EU law (para 40). 

Second, the referring court asked the CJEU to test the procedure for granting the order for payment and, subsequently, the enforcement, for compatibility with the Directive. The CJEU recalls its previous case-law to the effect that the absence of unfairness assessment in the order for payment procedure is not per se problematic as long as the consumer is protected by the possibility of (ex officio) unfair terms control at the stage of enforcement.  However, insofar as Slovak law requires the debtor to file a motivated objection within 15 days, there is a concrete risk that no assessment will take place since the requirements make it rather difficult for the consumer to take action (para 53). This situation is not in line with the Directive. 

Third, concerning the specific contract at stake, the court asked whether the provisions in the credit contract could be considered as transparent in spite of the lack of mention of the APR and interest rate. Mentioning of the APR is required on the basis of the 1987 consumer credit directive - but what impact does a violation of that requirement have on  the unfairness assessment? According to the CJEU, the consequence of this omission is that the consumer cannot be considered as liable for having actually accepted the terms of the contract (para 67), with the consequence that, to the ends of unfair terms control, the missing APR can be considered as a decisive factor in assessing whether the interest terms are drafted in plain intelligible language. This finding, of course, will then open the way to a possible finding of unfairness. 

Thursday, 20 September 2018

May consumers bear exchange rate risk? - CJEU in OTP Bank and OTP Faktoring (C-51/17)

Today the CJEU issued its judgment in the OTP Bank and OTP Faktoring case (C-51/17). We have previously discussed the AG Tanchev's opinion in this case (Kasler repercussions...) and we refer our readers to that blog post first, for re-acquaintance with the facts of the case.

Legislators' intervention in a contractual relationship and its consequences for the unfairness test

Hungarian law, attempting to accommodate previous CJEU's judgment in the Kásler case, intervened in already concluded consumer credit relationships. With an ex tunc effect it replaced existing contractual terms prescribing consumer credits in foreign currency, which were deemed to be unfair, with new ones - setting a fixed exchange rate pursuant to the National Bank of Hungary and converting foreign currency loans into loans in Hungarian forints (HUF). However, such a legislative intervention might have introduce new terms into consumer credit contracts, such as the one placing the foreign exchange rate risk on consumers (due to the automatic amendment of contracts pursuant to new exchange rates). 

The CJEU considers such added terms not to be 'individually negotiated', as consumers had no possibility to negotiate them, which means that they fall within the scope of unfairness test, pursuant to Article 3(1) UCTD (paras 48-49). However, Article 1(2) UCTD allows to exclude from the unfairness test such standard contractual terms, which reflect statutory or regulatory provisions and are mandatory. These two conditions need to be met cumulatively, as was decided in the previous CJEU's case Andriciuc and Others (para 52), and are narrowly interpreted (para 54). By introducing new mandatory statutory terms to consumer credit contract, Hungarian legislator excluded then such terms from the scope of the UCTD (para 64). However, the CJEU emphasises the fact that the legislative additions were "not intended to address in full the issue of foreign exchange risk in respect of the period between the time when the loan contract at issue was concluded and its conversion into Hungarian forints..." (para 67). This means that the terms placing foreign exchange rate risk on consumers are not fully based on statutory rules and thus may fall within the scope of the unfairness test. These terms are, however, core contractual terms and pursuant to Article 4(2) UCTD may only be assessed as to their unfairness when they lack transparency (para 68).

Transparency requirements

Whether the terms placing foreign exchange rate risk on consumers were transparent is for the national courts to decide. However, the CJEU gives some guidance to national courts on this issue. It replaces its direction from the case Andriciuc and Others for national court to go beyond mere examination of formal and grammatical intelligibility of consumer credit terms (para 73). It refers to the recommendation of the European Systematic Risk Board (Recommendation ESRB/2011/1 of 21 September 2011) that "financial institutions must provide borrowers with adequate information to enable them to take well-informed and prudent decisions and should at least encompass the impact on instalments of a severe depreciation of the legal tender of the Member State in which a borrower is domiciled and of an increase of the foreign interest rate" (para 74). This means further that the loan institution needs to clearly inform consumers of the risk they are exposing themselves to by concluding a credit contract in a foreign currency, mentioning the dangerous and serious consequences of a possibility of home currency's depreciation. This should be done by setting out possible variations in the exchange rate risks and their consequences (para 75). Not to mention that the consumer should have been given sufficient time to carefully examine all pre-contractual information (para 76).

Tuesday, 18 September 2018

Second-guess or second instance: Opinion of AG Szpunar in five cases on the EU Court of Justice and differences of interpretation between lower, higher and highest national (civil) courts

"La protection du consommateur est ainsi devenue un des chapitres essentiels du droit de l’Union qui, avec une double dimension – tant économique que sociale –, touche à la vie quotidienne des consommateurs de l’Union.
~ Advocate General Szpunar, Opinion in Cases C-70/17 and C-179/17 (point 53)


Consumer protection has become "an essential chapter of EU law", as Advocate General Szpunar rightly observes in one of his Opinions that were published this week. It is a focal point in the interplay between different actors at different levels in EU law. In 3 Opinions, AG Szpunar discusses 5 separate cases that touch on the relation between the national (civil) courts of the EU Member States and the EU Court of Justice in respect of the interpretation and application of national (procedural) law in the light of the Unfair Contract Terms Directive. It appears that the CJEU provides an avenue for lower courts to 'second-guess' the approach of courts that are higher in hierarchy, to the extent that they challenge the instructions of their own appellate court or the case law of the Supreme Court. Through preliminary references, the CJEU may be called upon to settle differences between courts of different instances. This raises questions as to the division of competences between the EU and the Member States, as well as the link between the substantive and procedural protection of EU citizens in their role as consumers. In the absence of harmonised procedural rules, who is the ultimate interpretor of national provisions governing civil proceedings (involving consumers)? Is there any room for a balancing of interests, other than the 'overriding objective' of the protection of consumers against unfair terms? And who decides what's in the consumers' best interest? 

Five cases, three Opinions

The 3 Opinions this blog post is concerned with pertain to the following 5 cases:
  • C-70/17 (Abanca v. García Salamanca Santos) and C-179/17 (Bankia v. Lau Mendoza), hereinafter referred to as the Abanca-case; click here
  • C-486/16 (Bankia v. Sánchez Martínez); click here
  • C-92/16 (Bankia v. Rengifo Jiménez) and C-167/16 (BBVA v. Quintano Ujeta); click here

Especially the Opinion in the Abanca-case is worth reading. AG Szpunar analyzes the background of consumer protection against unfair terms elaborately, and summarises the development of the CJEU's case law in this area. He also tries to distinguish the legal issues from socio-economical considerations, and to clarify the role of national (civil) courts from an EU law perspective. In this blog post, we will focus on two aspects:
  1. the power of national courts to substitute a national legislative provision for an unfair term, or rather: the lack of such a power (cf. Joined Cases C-96/16 and C-94/17, discussed here), and
  2. the possibility of lower courts to 'circumvent' guidance given by a higher court by making a preliminary reference to the CJEU.
Both aspects illustrate the tension between the requirements flowing from EU (consumer) law and a more traditional view on private law and civil procedure as a matter of national law. On the one hand, AG Szpunar's answers to the questions posed by the referring courts could be seen as a logical continuation of the CJEU's case law. On the other hand, those answers could be seen as limiting the room for discretion of national (civil) courts even further. However, AG Szpunar carefully considers the different interests involved, and explains that while he understands the concerns, his proposed solution is in line with previous judgments.

First, we will examine the type of contractual terms at issue in these cases. It is not so much about the assessment of the (un)fairness of those terms as such, as it is about the consequences of a finding of unfairness. Secondly, we will take a closer look at the procedural implications. At the end of this blog post, we will get back to the position of lower courts vis-à-vis higher courts.

Accelerated repayment and mortgage enforcement: differences of interpretation between Spanish courts

The 5 above-mentioned cases are all requests for preliminary rulings from Spanish civil courts: in the Abanca-case, the Spanish Supreme Court (Tribunal Supremo) itself, in the other cases courts in first instance (Juzgados de Primera Instancia). All 5 cases relate to so-called 'early maturity' or acceleration clauses in mortgage loan agreements, i.e. terms containing an advanced expiration date (vencimiento anticipado): when the debtor fails to meet his payment obligations, the creditor can claim repayment of the totality of the loan after the expiration of a stipulated time period and initiate mortgage enforcement proceedings. The CJEU's judgment in Aziz gave rise to a debate in Spain as to, among other things, when the debtor's non-compliance was "sufficiently serious" - in the light of the duration and amount of the loan - to justify the creditor's exercise of the right to invoke accelerated repayment (cf. Banco Primus). Since 2013, Article 693.2 of the Spanish Code of Civil Procedure (Ley de Enjuiciamiento Civil; hereinafter LEC) sets the minimum time period that the parties may agree on at 3 months. However, many contracts predating that provision allowed the creditor to invoke the clause after only 1 month. In this respect, it is relevant to know that in Spain, the creditor needs leave from the court to enforce his security rights. Therefore, the question arose how the court should deal with unfair acceleration clauses. Should the mortgage enforcement proceedings - which were based on the clause - be terminated even when the creditor has waited 3 months or longer?

The Tribunal Supremo. (source:
According to the Tribunal Supremo, the answer to this question was negative. As long as the right to invoke accelerated repayment was exercised fairly, the creditor would still have access to mortgage enforcement. The unfair clause would effectively be replaced by Article 693.2 LEC. One of the reasons given by the Tribunal Supremo was that the mortgage enforcement procedure is also more beneficial for consumers. The parties would not have to resort to ordinary proceedings. Thus, consumers would avoid the risk of having to pay high legal costs and default interest.

Some lower courts disagreed with this interpretation, and openly questioned it before the CJEU. They found that an unfair acceleration clause could not be replaced by reference to Article 693.2 LEC. Where the clause was the basis of the mortgage enforcement, the proceedings should be declared inadmissible or suspended; whether the clause had been invoked after 1, 3 or 38 months did not matter. Moreover, the creditor’s chances of success in ordinary proceedings were regarded to be low; this cast doubt on the Tribunal Supremo’s reasoning as to which procedure was actually more beneficial for consumers. Lastly, the referring court in Case C-92/16 wondered whether giving consumer-debtors procedural advantages in one procedure, as opposed to another, was compatible with the EU Charter of Fundamental Rights if it was up to the creditor, not the consumer, to choose between procedural mechanisms and thus, to decide whether or not the consumer could enjoy those advantages.

AG Szpunar: no ‘reparatory revision’ of unfair terms

AG Szpunar disagrees with the Tribunal Supremo's interpretation as well, and refers to Banesto and in this regard. The Unfair Contract Terms Directive imposes a result obligation on the Member States and their national courts to ensure that unfair terms are not binding on consumers. As we have seen in e.g. Gutiérrez Naranjo, this obligation is far-reaching. The Directive does not have 'direct horizontal effect', i.e. it cannot be relied on directly by private parties in 'horizontal' disputes. Yet, "not binding" really means "not binding", and the deterrent or dissuasive effect of the Directive requires that an unfair term cannot be revised or replaced by the court (only in exceptional circumstances, see e.g. Kásler). The acceleration clause must be struck out from the loan agreement, regardless of when it has been invoked by the creditor. The loan agreement will continue to exist without the clause. 'Reparatory revision' is not possible; the clause cannot be substituted with Article 693.2 LEC. That provision cannot be qualified as 'supplementary law', although this is ultimately for the national court to decide. 

A reference to the so-called 'blue pencil test' of the German Bundesgerichtshof does not help either, because the acceleration clause cannot be split up: it would lose its meaning if the unfair parts were to be crossed out. Without the stipulation of a specific time-period, the clause would practically be deprived of its purpose. 

Procedural implications

If AG Szpunar's conclusion is followed, creditors would be sanctioned for including unfair acceleration clauses in their standard terms and conditions by denying them access to the mortgage enforcement procedure. Once the acceleration clause is struck out, there is no longer a basis for enforcement of the entire loan. This would allegedly negate the creditor's security rights, which are crucial for the financial market. Another argument used by the Tribunal Supremo was that this would have economic repercussions. It should nevertheless be noted that the existence of an acceleration clause in the mortgage loan agreement is not a necessary precondition for enforcement (cf. Articles 578 and 693.1 LEC). Without the acceleration clause, the creditor would not be able to claim repayment of the entire loan at once, but he could still claim unpaid instalments due.

Advocate General Szpunar.
This raises the question whether it is justified that, as soon as the creditor relies on an unfair acceleration clause, he should be denied access to mortgage enforcement. AG Szpunar acknowledges that this constitutes a limitation of the creditor's rights, but not an extinction, if only because the loan agreement remains valid for the rest. From the Directive's point of view, the legal issue is whether the acceleration clause is unfair and should therefore be declared null and void, rather than whether the creditor would have provided the loan without the clause. According to AG Szpunar, it is not relevant whether the mortgage enforcement procedure is more beneficial to consumers. Yet, he illustrates with clear examples that is doubtful if this is indeed the case. The decision should ultimately be left to the consumer herself, who can be informed by the court about (procedural) advantages and disadvantages and then decide if she wants to avail herself of the protection offered to her; see e.g. Banif Plus Bank.

In Cases C-92-/16 and C-167/16, AG Szpunar observes that there is not enough information available to conclude that the Spanish mortgage enforcement procedure in general is incompatible with the Charter or the principle of effectiveness. If it is true that this procedure awards certain procedural advantages, it may be contrary to the principle of effectiveness. The specific characteristics of court proceedings, which are governed by national (procedural) law, cannot constitute a factor that is liable to affect the legal protection of consumers under the Directive.

Lower courts as EU-judges

In Case C-486/16, the creditor - Bankia - had initiated mortgage enforcement proceedings on the basis of an acceleration clause. The court found the clause to be unfair, and refused to grant leave for the enforcement. Pursuant to Article 552.3 LEC, the creditor then has recourse to ordinary proceedings. Instead, Bankia waited more than two years to try again, arguing that this time the non-compliance was sufficiently serious. We understand this second attempt was based on Article 693.2 LEC (not 693.1).
The court in first instance held that the decision in the earlier proceedings had the status of (formal) res judicata; it was final in the sense that it could no longer be appealed. This entailed that Bankia should be denied a second opportunity. The Court of Appeal, however, allowed the enforcement. The case was referred to the court in first instance, which subsequently made a preliminary reference to the CJEU. In line with his Opinion in the Abanca-case, AG Szpunar considers the Court of Appeal's approach to be contrary to EU (consumer) law. He points out that EU law gives lower courts the possibility to make a request for a preliminary ruling (Article 267 TFEU); they are EU-judges as well. National legislation or case law cannot stand in the way of this possibility.

From the perspective of (national) civil procedure, it is quite revolutionary for lower courts to go against the instructions of their own appellate court in the same case. These instructions are, in principle, binding upon the parties and the lower court. It may be seen as problematic if lower courts start to second-guess their appellate courts and/or come to view the CJEU as a second instance, insofar as this undermines legal certainty. Of course, this is not to say that lower courts cannot or should not make preliminary references. It is just to show that the objectives of EU law and national law are not always aligned.

Lower courts and the highest (civil) court of a Member State are both entitled to ask questions to the CJEU. That the Tribunal Supremo was first in the Abanca-case, could not stop the Juzgado de Primera Instancia de Barcelona from making a preliminary reference as well. For the Tribunal Supremo this is a sensitive issue, as it appears to be a direct confrontation by the court in Barcelona. In addition, AG Szpunar's Opinion suggests that the Tribunal Supremo has overstepped its power to give guidance to lower courts as to how to apply national (procedural) law in unfair terms cases. The summary of the Opinion in this blog post does not do justice to its thoroughness, which demonstrates that AG Szpunar is aware of the context in which the CJEU must answer the questions put before it.

Friday, 14 September 2018

SIM cards with pre-installed services can be an aggressive practice: CJEU on Wind Tre

On 13th September, which was a busy day for consumer law cases, the ECJ published its judgement on the Wind Tre case (C-54/17 and C-55/17).

Wind Tre concerns the Unfair Commercial practices directive and in particular, aggressive commercial practices, which have been the subject of very few cases, therefore this judgement is meant to be illuminating as to the meaning of the aggressive practices provisions.

This blog reported on the AG opinion on this case, published on 31st May 2018. It is interesting to see that the judgement has departed from the AG opinion, yet managed to steer clear out of some of the more thorny issues.

Facts of the case

In Italy, two companies Wind Tre and Vodafone Italia, sold mobile phones with SIM-cards with pre-installed answering and internet services. Consumers were not informed about the pre-installed services, thus leaving them exposed to charges.

The Italian Market Authority (Autorità Garante della Concorrenza e del Mercato, hereafter AGCM) imposed fines on the two companies for engaging in an aggressive practice. The telecom companies challenged that decision in court, claiming that the AGCM lacked competency to impose fines stating that the telecommunications authority (Autorità per la Garanzie nelle Comunicazioni, hereafter: AGCom) was responsible instead. This argument was based on art. 3(4) UCPD stating that in case of a conflict between the UCPD and other sectoral rules on unfair commercial practices, the latter will prevail and apply.

Questions referred

Seven questions were referred to the ECJ, which, following the approach of the AG placed them in groups.

The first two questions  were summed up as whether the conduct of the traders, where SIM cards on which specific services such as internet browsing services and voicemail services had been pre-loaded and pre-activated, without first sufficiently informing the consumer of that pre-loading and pre-activation, nor of the cost of those services, can be characterised either as an aggressive practice according to art.8-9 UCPD or as inertia selling, as per point 29 of Annex I of the UCPD.

The remaining questions referred to whether 'Article 3(4) of Directive 2005/29 must be interpreted as precluding national rules under which conduct constituting inertia selling, within the meaning of Annex I, point 29 of Directive 2005/29, such as that at issue in the main proceedings, must be assessed in the light of the provisions of that directive, with the result that, according to that legislation, the ARN, within the meaning of the Framework Directive, is not competent to sanction such conduct' (para 57).

Inertia selling and average consumer

The judgement set out the conditions for finding a practice to be aggressive and focuses freedom of choice of the consumer. 'For a service to be solicited the consumer must have made a free choice' (para 45). Furthermore the information provided must be clear and adequate and certainly information on the price is considered necessary for an informed decision (para 47). Interestingly, ECJ frames aggressive practices around information, which bears the question: what then distinguishes aggressive from misleading practices?
The Court found that selling SIM cards with pre-installed internet and voicemail services without first sufficiently informing the consumer of the pre-loading, pre-activation and cost of theses services would be conduct falling within the term 'inertia selling' (para 56).

Thus, the Court did not follow the AG opinion, also clarifying that whether there was 'concious action' or 'active conduct' on behalf of the consumer, is irrelevant for deciding whether a practice has been aggressive (para 49). This is a welcome clarification, as following the 'active conduct' requirement set by the AG would have made the conditions too restrictive and departed from the letter of the law, as the UCPD itself requires no such condition.

However, the judgement was more complex than simply establishing that such conduct falls under inertia selling. There is the caveat that it is for the referring court to verify whether such conduct took place. This is surprising as the main facts of the case, which are that the services were pre-installed and consumers were not informed of that fact are not disputed.

What is even more puzzling is that the decision refers to the conduct of the average consumer. The referring court has to verify whether the average buyer of a SIM card might be aware of the fact that it automatically contains such pre-installed services that incur additional fees (para 52). While this condition would make sense if art.8 UCPD was applied, the average consumer concept does not apply to the blacklist and in this case to inertia selling. 

It seems like there is no escaping the average consumer, yet the Court does not provide any guidance as to how that test is to be applied. It limits itself to referring to rec.18 UCPD as stating that the reaction of the average consumer is to be established by the referring court (para 52). However, there is nothing in recital 18 or anywhere else that restricts the ECJ from deciding on the behaviour of the average consumer. Contrary to that, it does state that national courts and authorities should decide taking into account the case law of the Court of Justice. Yet, it seems like the ECJ is refraining from offering (much needed) guidance to the national courts.

Relationship between UCPD,  Universal Service Directive and Framework Directive

Art. 3(4) UCPD states that in cases of conflict between the UCPD and other EU rules regulating specific aspects of unfair commercial practices (lex specialis), the latter are to prevail. 
The question here is whether such conflict indeed exists, and the Court agrees with the AG that conflict is a strong term one that 'goes beyond a mere disparity or simple difference, showing a divergence which cannot be overcome by a unifying formula enabling both situations to exist alongside each other without the need to bring them to an end' (para 60). Furthermore, it only refers to conflicts between EU rules, and not national rules (para 59).

The Court cites previous case Polkomtel which found that the Framework Directive and the Universal Service Directive (hereafter:USD) do not provide for full harmonisation of consumer protection aspects. (para 64). Furthermore, while art. 20(1) USD sets information requirements for traders it does not regulate inertia selling and in any case, art. 1(4) USD sets out that the directive is without prejudice to EU consumer protection rules.

Therefore, the Court finds that in this case, there is no conflict between the UCPD and these two Directives.

This is a very interesting judgement, not only for what it includes, but also on what it failed to include. While this was an opportunity to shed light on aggressive practices and the average consumer, it seems like the ECJ let it pass by.