On the 18th of June 2020 the CJEU delivered its judgement in C-639/18 KH v Sparkasse Südholstein on the interpretation of Art. 2(a) of Directive 2002/65/EC on Distance Marketing of Financial Services. Unfortunately, the CJEU did not follow AG Sharpston's consumer friendly opinion (on which we reported here).
The facts
To remind us of the facts, KH concluded three contracts with her regional Sparkasse. These contracts were with a fixed interest rate for a fixed period of time after which they would switch to a variable rate in the absence of an agreement between the parties on a new fixed rate (for a newly fixed period). The original contracts were concluded at a branch, but the renegotiated agreement on the interest rates were concluded at a distance, thus KH claimed that Directive 2002/65/EC was applicable giving her a right of withdrawal, which KH intended to use.
The legal question
The legal questions thus arose, whether the newly reached agreements on interest rates were separate contracts (to which the Directive would apply), or as the bank claimed, just 'operations' or amendments of the initial contracts (to which the Directive would not apply). Hence, KH's right of withdrawal depended on the interpretation of Art. 2(a) of Directive, i.e. 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'.
The ruling
In interpreting the phrase 'contracts concerning financial services' the CJEU concluded that the present agreements on the alteration of the interest rates are not separate contracts, they are not 'contracts concerning financial services' within the meaning of the Art. 2(a) of the Directive because they do no more than to alter the originally agreed rate of interest without changing the duration or the amount of the loan.
In its analysis, the CJEU referred to Art. 2(b) of the Directive that defined the concept of 'financial service' as including, among others, contracts of credit. In determining more closely the essence of a credit contract, the CJEU referred to its previous case-law (C-249/16) that clarified that the characteristic obligation of the contract is the granting of the sum lent, whereas the borrowers obligation to repay the sum borrowed is 'merely a consequence of the performance of the the service by the lender'.
In discussing the argument that the newly agreed interest rates are just operations of the initial credit contract, the CJEU disagreed. Having regard to the examples given in Recital 17 (such as opening a bank account as an initial service agreement and withdrawing money from the account as its operation), an amendment that sets a new rate of interest as a result of a renegotiation of a clause in the initial contract (which provides for a variable, 'back-up' rate of interest) is neither an 'operation' of the initial agreement nor an addition to the elements of the initial agreement.
The CJEU concluded that in order for a contract to qualify for a 'contract concerning financial services' under Art. 2(a) of the Directive it must be for a supply of 'such service' and this condition is not fulfilled here. These were only amendments of the rate of interest payable for the service that was previously agreed.
Finally, although the CJEU noted that one of the objectives of the Directive is to ensure a high level of consumer protection, in order to enhance consumer confidence in distance selling of financial services that would facilitate the free movement of financial services, according to the CJEU, 'such an objective does not necessarily require' that an agreement setting out the new interest rate is considered as a new contract for financial services.
Given the above conclusion, the CJEU considered unnecessary to answer the other question asking for the interpretation of the meaning of a contract concluded 'under an organized distance sale or service-provision scheme run by the supplier.'
Our evaluation
This judgment deals with an important question in (long term) financial services contracts such as credit, insurance, investment and pensions, where the initial agreement is subject to later changes by way of amendments, ruling that the status of these later agreements are not separate contracts.
This important and potentially far reaching conclusion (given that the Directive applies to all financial services) is not well supported with analysis. The key line of thinking in this judgement seems to be that the 'contract concerning financial services' must provide for a service, must be for a supply of a financial service, and anything short of this, would not be considered a separate contract. While this argument may have merits, there is very little engagement with what is meant by a 'service.'
One the other hand, one would have expected that there will be a much better analysis of the contractual aspect of the transaction, the meaning of the contract and its formation especially that this was the focus of AG Sharpston's opinion. Apart from the reference to one previous case-law there is no engagement with the meaning of contract and its essential elements. Examples of European solutions would have been useful and they might have lead to a different conclusion. For instance, Section 6:383 of the Hungarian Civil Code defines loan contract by reference to the obligations of the parties under which the creditor is obliged to provide the agreed sum of money, and the debtor is obliged to repay this sum with interest. Interest thus appears as named essential element of the contract and clearly one could argue that changing an essential element of the contract can only be done by way of a new contract?
Finally, there is no mention of power imbalances and the consumers' weaker position in negotiating with the bank, even in this case, where the consumer is likely to engage with the process (by contemplating options and accepting one option offered by the bank). It would have been useful to take into account the way in which these contracts (and their amendments) are concluded in practice.
One the other hand, one would have expected that there will be a much better analysis of the contractual aspect of the transaction, the meaning of the contract and its formation especially that this was the focus of AG Sharpston's opinion. Apart from the reference to one previous case-law there is no engagement with the meaning of contract and its essential elements. Examples of European solutions would have been useful and they might have lead to a different conclusion. For instance, Section 6:383 of the Hungarian Civil Code defines loan contract by reference to the obligations of the parties under which the creditor is obliged to provide the agreed sum of money, and the debtor is obliged to repay this sum with interest. Interest thus appears as named essential element of the contract and clearly one could argue that changing an essential element of the contract can only be done by way of a new contract?
Finally, there is no mention of power imbalances and the consumers' weaker position in negotiating with the bank, even in this case, where the consumer is likely to engage with the process (by contemplating options and accepting one option offered by the bank). It would have been useful to take into account the way in which these contracts (and their amendments) are concluded in practice.
In addition, the line of reasoning is also weakened by the CJEU's intention to give special status to these amendments (as they are nether separate contracts nor are they the operations of the initial service agreement) without clarifying the details of this special status and what it entails in terms of the rights and obligation of the parties.
Finally, it remains unclear why amendments to (long term) financial contracts are unimportant for the facilitation of a high level of consumer protection and the internal market in financial services. I would argue the contrary, it is indeed important to consider amendments as separate contracts to enhance consumer confidence in concluding (long term) financial contracts and to provide consumers with the protection guaranteed by the Directive, including the important right of withdrawal.
