On the 12th of March 2020 Advocate General Sharpston delivered her Opinion in C-639/18 KH v Sparkasse Südholstein on the interpretation of Article 2(a) of Directive 2002/65/EC on Distance Marketing of Financial Services.
The facts
This case involves the German Sparkasse Südholstein regional bank. While mortgage contracts are only concluded face to face in its branches, in some cases, in the context of ongoing banker-customer relationship, additions or amendments to these contracts can also be made with the use of distance communication.
In the period of 1994-99 the parties concluded 3 contracts. Two in July 1994 for purchase of immovable property and one in 1999 for personal loan. All three contracts were concluded with an initial fixed interest rate that would switch to a variable rate following the expiry of the period for which the interest rate was initially fixed. As it is usually the case, before the end of this fixed period, the contract was open for negotiation, and a new fixed rate for a newly agreed period could have been agreed between the parties. The present parties negotiated new interest rates in 2008, 2009 and 2010 respectively.
However, in 2015 KH withdraw from the above three contracts setting out the new interest rate claiming that these contracts involved distance selling thus entitling KH for a right to withdrawal under the national provision implementing Directive 2002/65/EC.
The legal problem
The legal issue in this case was whether KH had a right of withdrawal, and this depended on the interpretation of Art. 2(a) of Directive 2002/65/EC, whether the transactions setting out the new interest rates where covered with the concept of a 'contract concerning financial services' and a contract 'concluded under an organized distance sale or service-provision scheme.' In other words, whether the newly agreed interest rates were considered to be new distance contracts or merely 'operations' of the initially concluded credit contracts.
The analysis: a 'contract concerning financial services'
After careful analysis, AG Sharpston answered the first question positively, holding, that a 'contract concerning financial services' in Art. 2(a) of Directive 2002/65/EC indeed includes contracts for the modification of the interest rate that makes no other (substantial) changes to the contract, it neither extends the term of the contract nor modifies the amount of the loan.
In her interpretation AG Sharpston relaid on the wording of the provision, the purpose of the Directive and the explanations of the aims of the provisions of the Directive contained in the recitals of the Directive.
First of all, AG Sharpston highlighted the purpose of the Directive to give a number of rights to consumers in distance financial services contacts that is important for the provision of a high level of consumer protection and the increase of consumer confidence in the internal market.
It follows, that the concept of a 'distance contract' must be interpreted broadly, because Art. 2(a) refers to 'any' contract concerning financial services. The same approach would be suggested by recital 14 that suggest the Directive covers 'all' financial services.
It follows, that the concept of a 'distance contract' must be interpreted broadly, because Art. 2(a) refers to 'any' contract concerning financial services. The same approach would be suggested by recital 14 that suggest the Directive covers 'all' financial services.
Further, AG Sharpston discarded Sparkasse Südholstein's argument that the subsequent contracts for the modification of the interest rate are only 'operations' within the meaning of the Directive that follow the initial service agreement, according to which, the subsequent contracts for the modification of the interest rate are not self-standing, separate contracts, i.e. 'contracts concerning financial services'. Following Article 1(2) of the Directive, a contract that is comprised by an initial service agreement followed by successive operations or series of separate operations of the same nature performed over time, would not fall within the scope of the Directive. Referring to Recitals 15-17 AG Sharpston explained the difference between an 'operation' of an existing contract and a new contract, emphasizing that adding new elements to an existing service agreement is not an operation of the existing contract but a new contract. Relying on Recital 15 that defines distance contracts as those where the offer, negotiation and conclusion are done at distance, AG Sharpston concludes that constitutive elements of contract formation under the Directive are the offer, the acceptance and the meeting of the minds. While this conclusion seems somewhat unsubstantiated without at least some reference to national jurisdictions where these requirements are applied, her overall analysis seems to be well supported. Thus a key element for a 'contract' to exist under Article 2(a) of the Directive is that there is an agreement between the parties. An 'agreement' can be defined by contrast to an 'operation'. An operation is 'an act of executing agreement without adding elements for which a new meeting of minds would be required' (para. 51). The AG rightly asserts that in the context of a credit contract, an operation would thus cover transactions such as payments reducing the total amount owed to the bank. Further on, an 'agreement' can also be defined by looking at the conclusive elements of a contract. AG Sharpshon explains that a 'characteristic obligation' or essential element of the contract is the granting of the sum borrowed (lenders obligation), the repayment of the sum borrowed (borrowers obligation), agreement on the structure and the duration of the repayment period and the interest rate. The interest rate can be fixed or variable, and as this case also shows, the usual banking practices when concluding contracts with a fixed rate is that this fixed rate is only for fixed period of time, following which, if no agreement on a new fixed rate is agreed, the banks variable rate will apply. Thus without an agreement on a new fixed rate, the initial contact would not remain unchanged, AG Sharpston emphasizes that it would change substantially, as one of the main elements of the contract would change, i.e. the interest rate. AG Sharpston then concludes that since the importance of this element, an agreement on the new fixed interest rate cannot be a mere operation of the existing contract but it is rather a new contract between the same parties.
The analysis: a contract 'concluded under an organized distance sale or service-provision scheme'
This case also involved the interpretation of a phrase 'concluded under an organized distance sale or service-provision scheme' given that the bank did not solely use distance communication for contract conclusion. The AG concluded again positively, establishing the necessary elements. According to AG Sharpston, contacts are concluded under an organized distance sale or service-provision scheme 'where a supplier, in order to conclude a subsequent interest rate agreement, makes exclusive use of means of distance communication, where the use of those means in exclusive and not strictly occasional but forms part of a framework set by that supplier, in terms of its commercial structure, including staffing and resources, allowing it to conclude contracts without the simultaneous physical presence of the parties'.
In her analysis, AG Sharpston referred back to Article 2(a) and the necessary elements there for a distance contracts. First, that the two parties must not be physically and simultaneously present when the contract is prepared and concluded but rather they exclusively used some means of distance communication such as phone, email, etc. Importantly, the AG asserts that any prior face to face contact between the parties for the purposes other than the conclusion of the contract in question are of no relevance. The second and the more disputed element here is that the transactions much be carried out under an organised distance sale or service provision scheme run by the supplier, who makes exclusive use of distance communication. Apart from Recital 18 that excludes services provided on occasional basis and without a dedicated commercial structure, the Directive does not give any further guidance. However, relying on the wording of Article 2(a) AG Sharpston determined that the scheme must fulfill several criteria. First, it must be an organized scheme, the supplier must have the necessary commercial structure including staffing and resources to conclude contracts at distance. Second, the scheme must be run by the supplier. The supplier must set up the framework to offer the conclusion of distance contracts. Third, running such a scheme must be exclusive for the purpose of the contract in question, that is, it must cover the offer, the negotiation and the conclusion of the contract. Finally, the conclusion of a distance contract should be a normal or regular possibility when concluding contacts. Importantly, the AG clarifies, that once the system is set up, it does not have to be used frequently or systematically, as all the Directive requires is that it is not used 'strictly occasionally'.
Discussing the particular case, AH Sharpston asserted that Sparkasse Südholstein seems equipped both with staffing and resources to run an organized scheme of distance selling, and the fact that Sparkasse Südholstein concludes certain types of contracts exclusively at its branches should not be an obstacle for also running an organized distance selling scheme. Looking at the particular contracts concluded with KH, the AG emphasized that it should be of no relevance for the present analysis that the initial credit contracts were concluded at a branch, as the Directive does not require every single contract to be concluded at distance when there is an ongoing banker customer relationship between the parties. The application of Article 2(a) of the Directive should be observed independently from the rest of the relationship, taking into account only the particular contract, i.e. the contract setting out the new interest rate.
Concluding thoughts
The analysis: a contract 'concluded under an organized distance sale or service-provision scheme'
This case also involved the interpretation of a phrase 'concluded under an organized distance sale or service-provision scheme' given that the bank did not solely use distance communication for contract conclusion. The AG concluded again positively, establishing the necessary elements. According to AG Sharpston, contacts are concluded under an organized distance sale or service-provision scheme 'where a supplier, in order to conclude a subsequent interest rate agreement, makes exclusive use of means of distance communication, where the use of those means in exclusive and not strictly occasional but forms part of a framework set by that supplier, in terms of its commercial structure, including staffing and resources, allowing it to conclude contracts without the simultaneous physical presence of the parties'.
In her analysis, AG Sharpston referred back to Article 2(a) and the necessary elements there for a distance contracts. First, that the two parties must not be physically and simultaneously present when the contract is prepared and concluded but rather they exclusively used some means of distance communication such as phone, email, etc. Importantly, the AG asserts that any prior face to face contact between the parties for the purposes other than the conclusion of the contract in question are of no relevance. The second and the more disputed element here is that the transactions much be carried out under an organised distance sale or service provision scheme run by the supplier, who makes exclusive use of distance communication. Apart from Recital 18 that excludes services provided on occasional basis and without a dedicated commercial structure, the Directive does not give any further guidance. However, relying on the wording of Article 2(a) AG Sharpston determined that the scheme must fulfill several criteria. First, it must be an organized scheme, the supplier must have the necessary commercial structure including staffing and resources to conclude contracts at distance. Second, the scheme must be run by the supplier. The supplier must set up the framework to offer the conclusion of distance contracts. Third, running such a scheme must be exclusive for the purpose of the contract in question, that is, it must cover the offer, the negotiation and the conclusion of the contract. Finally, the conclusion of a distance contract should be a normal or regular possibility when concluding contacts. Importantly, the AG clarifies, that once the system is set up, it does not have to be used frequently or systematically, as all the Directive requires is that it is not used 'strictly occasionally'.
Discussing the particular case, AH Sharpston asserted that Sparkasse Südholstein seems equipped both with staffing and resources to run an organized scheme of distance selling, and the fact that Sparkasse Südholstein concludes certain types of contracts exclusively at its branches should not be an obstacle for also running an organized distance selling scheme. Looking at the particular contracts concluded with KH, the AG emphasized that it should be of no relevance for the present analysis that the initial credit contracts were concluded at a branch, as the Directive does not require every single contract to be concluded at distance when there is an ongoing banker customer relationship between the parties. The application of Article 2(a) of the Directive should be observed independently from the rest of the relationship, taking into account only the particular contract, i.e. the contract setting out the new interest rate.
Concluding thoughts
This case involves a 'typical' legal problem in long term contracts where following the initial contact several other agreements are reached throughout the time that raises the question of the status of these new agreements: are they separate, independent contracts or are they just the operation of the initially concluded contract. The AG's conclusion seems to be correct as having these agreements as independent contracts provides a higher level of protection of consumers as if they were not separate contracts. In particular in regard to the right of withdrawal- this important right would not exist if the new agreement on the interest rate is not an independent contract. This case arose in the context of credit contracts. However, AG Sharpston's overall conclusion and the important message on the need to set out the Directive's scope of application broadly for achieving a high level of consumer protection is an important one. It could have far reaching implications, given that the Directive relates to all financial services and similar problems might arise in the context of other long term financial contracts such as life insurance or personal pensions.
