Services performed, no right to payment - CJEU in DC (C-97/22)

On May 17th, the CJEU issued a judgment in the German case DC (Rétractation après l’exécution du contrat) (C-97/22) interpreting Article 14 of the Consumer Rights Directive. Article 14 CRD determines consumers' obligations when they withdraw from a contract. This includes releasing consumers from their obligation to pay for the performance of services provided during the withdrawal period, if consumers were not pre-contractually, transparently informed about their obligation to pay in such circumstances, as well as about conditions for using their right of withdrawal (pursuant to Article 6(1)(h) and (j) CRD). 

By Jimmy Nilsson Masth on Unsplash

The consumer in the given case concluded an oral, off-premises contract for the renovation of the electrical installations in their house. There was no information provided on the right to withdrawal at that time. This became an issue when the contract was fully performed and the consumer did not pay the invoice for the provided services. The consumer claimed they did not have to pay, as they subsequently withdrew from the contract and Article 14(4)(a)(i) and (5) CRD released them from their obligation to pay due to the consumer not having received relevant pre-contractual information on their right of withdrawal. German courts posed a question whether CRD's rule that consumers should no bear any costs in such circumstances extends as far as to prevent traders and service providers from asking for any compensation for enhancing consumers' assets, 'in breach of the prohibition of unjust enrichment' (para 19).

The CJEU very summarily confirms that indeed, in order to provide high level of consumer protection aimed at by the CRD, and considering the full harmonisation character of its provisions, the consumer may not be obliged to 'incur costs that are not expressly provided for by that directive.' (para 31). This conclusion also supports the 'fundamental importance which Directive 2011/83 ascribes to the pre-contractual information' (para 32).

The consequence of this judgment is that if service providers breach their pre-contractual information obligations, consumers benefit from this breach regardless whether consumers themselves act in good or bad faith. The CJEU is clear that service providers may not rely in such a case on the principle that any penalties should be proportionate (para 32). This judgment assigns then quite a far-reaching sanction to the breach of pre-contractual information duties. Of course, traders and service providers may easily protect themselves against these sanctions by fulfilling their information obligations. Still, it is curious to have the 'fundamental importance' of pre-contractual information obligations recognised at a time when the critique of their effectiveness as consumer protection measures is at its highest. Is it the Court's intention to try to revive them somewhat?

Workload problems in the air, nothing out of ordinary - CJEU in TAP Portugal (C-156/22 to C-158/22)

In a judgment issued today the CJEU had another chance to restrictively interpret the concept of 'extraordinary circumstances' from Regulation 261/2004. If extraordinary circumstances occur, this limits the airlines' obligation to compensate passengers of cancelled or delayed flights. 

By Andrés Dallimonti on Unsplash

In TAP Portugal judgment (joined cases C-156/22 to C-158/22) an early morning flight from Stuttgart (Germany) to Lisbon (Portugal) was cancelled due to the death of a co-pilot, which occurred earlier on the same day. Unsurprisingly, the whole crew was unfit to fly and since TAP does not have a base in Stuttgart, the replacement flight with a new crew was only managed to be arranged for late afternoon that day. The referring court found disparities between the application of the concept of 'extraordinary circumstances' to situations of unexpected illness of crew members by national courts and asked CJEU for guidance. 

Previous case law interpreted the notion of 'extraordinary circumstances' restrictively as: 1) not inherent in the normal exercise of air carrier's activity AND, 2) beyond that carrier's actual control (paras 18-19, see e.g. our comment on Airhelp case). Unsurprisingly, the CJEU declares workload planning for crew members as falling within the normal exercise of the air carriers' activity (para 21). And anyone who has ever managed staff knows that this includes anticipating and resolving unexpected absences, although luckily usually resulting from less extreme circumstances (para 22). Legally speaking, as CJEU emphasises, the reason for the unexpected absence makes no difference to the fact that the air carrier should anticipate dealing with unexpected absences (para 23). It is also irrelevant whether the absent crew member recently had been cleared medically, as unexpected illness or death may happen at any time (as morbid of a remark as it is true, para 24; this reasoning is also analogous to the one on technical defects of airplanes not constituting extraordinary circumstances even if the defect occurred in plane parts that were regularly maintained and recently checked, see e.g. van der Lans case). This means that the first condition to perceive this situation as qualifying as an extraordinary circumstances is not fulfilled. 

The CJEU consistently limits then the scope of application of the 'extraordinary circumstances', ensuring wide scope of protection offered to passengers of cancelled or delayed flights. It seems unlikely that airlines could afford to keep spare crew members at different airports to anticipate unexpected illness/death. They could though, of course, consider working with a pool of freelancing crew members, rotating between different airlines, when and as needed. The alternative is to accept the need to pay compensation to passengers, which means adding this to the flight tickets prices and/or re-negotiating insurance policies.

Enforcement of consumer law in digital age: the EnfTech Project

In order to provide much-needed help to the enforcement of consumer law, our readers may be interested in the recently launched EnfTech Project.

EnfTech is a broad term for the use of technological innovations by enforcement agencies to help deliver enforcement activities. This could include market surveillance, such as scanning for misleading pricing or fake advertising; an investigative activity that uses machine learning to interrogate company documentation; preventative measures such as reviewing consumer contracts for unfair clauses before they reach the market. In the future, it may have the potential to directly execute or enable an enforcement action such as a warning, takedown, or sanction.

EnfTech was launched on the 20th of April via an online event. The recordings of the event, the associated blog, and contact details are available here.

The (un)fairness of fees - the CJEU in C-565/21 CaixaBank S.A.

On the 16th of March 2023, the CJEU delivered another judgment on the interpretation of Directive 1993/13/EC on Unfair Contract Terms (UCTD), C-565/21 Caixabank S.A v X. As many before, this judgment also concerned mortgage credit.

 

This case is about the validity of a so-called 'arrangement fee' that was charged to the consumer in the amount of EUR 845. According to the applicable Spanish law, an arrangement fee meant all expenses related to the examination of the loan application, the granting, and processing of the mortgage loan, or other similar expenses that are necessarily associated with the loan application. The law required the fee to be a single sum for all associated expenses.

 

It appears that this lex specialis providing for arrangement fees caused uncertainty in terms of how it affects the horizontal, lex generalis rules of the UCTD, and whether the practice of Spanish courts of giving priority to lex specialis in ruling on the validity of arrangement fees is compliant with EU law.7

 

The CJEU took this opportunity to clarify the question and reinforce its earlier by now established case law and to provide novel addition to these by ruling on the interpretation of Articles 4(2), 5 and 3(1) of the UCTD.

 

Is the assessment of the fairness of the arrangement fee excluded based on Article 4(2) of the UCTD?

 

With its first question the referring Spanish Supreme Court essentially asked the CJEU to clarify the scope of the ‘main subject matter’ exception from the test of fairness. As we know, if the term amounts to the ‘main subject matter of the contract’ and is transparent it cannot be assessed for its fairness based on Article 4(2) of the UCTD.

 

The starting premise of the referring court was that the arrangement fee constitutes, along with the compensatory interest, the price of the mortgage loan and is therefore within the concept of ‘the main subject matter of the contract’ and exempted from the scrutiny of the test of fairness. Disregarding the somewhat odd approach to consider the arrangement fee a possible main subject matter of the contract when it is more likely to be the price and therefore fall under the second limb of Article 4(2), the ‘adequacy of the price’ exception, the CJEU gave a useful interpretation of the exception.

 

The CJEU referred to its established case-law, and noted that only those terms are exempted from the test of fairness as the main subject matter of the contract that define the essential obligations of the contract, which in the case of a loan contract would be the amount lent and repaid and the interest. Following this approach, the CJEU noted that in Caixabank and Banco Bilbao Vizcaya Argentaria (C‑224/19 and C‑259/19), the CJEU already ruled that the (Spanish) arrangement fee cannot be considered to be an essential obligation of a mortgage loan agreement only because it is included in the total cost of the loan.

 

The CJEU then highlighted the need to interpret the scope of the Article 4(2) exception restrictively and concluded that the obligation to pay for such services cannot be regarded as forming part of the main obligations arising from a credit agreement. It would be contrary to strict interpretation to include in the concept of ‘the main subject matter of the contract’ all services which are merely associated with the main subject matter itself and are therefore ancillary. The CJEU, therefore, emphasised once again, the main subject matter of the contract must be the main obligation of the contract, which in this case, would be the amount of the loan, as the main obligation of the lender, and the payment of the interest, as the main obligation of the borrower.

What is the meaning and scope of transparency under Articles 4(2) and 5 of the UCTD?

 

The CJEU ruled that whether the term is in plain and intelligible language under Article 5, the national court, taking into account all the relevant facts of the case, should ascertain whether the borrower had been placed in a position to assess the economic consequences for him or her, to understand the nature of the services provided in return for the costs provided for by that term and to ascertain that there is no overlap between the various costs provided for in the contract or between the services for which those costs are paid.

 

The emphasis above is the assessment based on the concrete facts of the case. An arrangement fee should not be regarded as automatically satisfying the transparency requirement arising from both Article 4(2) and Article 5 if the term satisfies the requirements imposed by national legislation. The CJEU emphasized, transparency should be assessed in the light of all the relevant facts, whether the borrower was indeed in a position to assess the economic consequences for him or her which derive from that term, to understand the nature of the services supplied in return for the costs provided for by that term, and to ascertain that there is no overlap between the various costs for which the agreement provides or between the services for which those costs are paid.

 

Very helpfully, the CJEU provided a list of circumstances that the national courts should, may, or should not consider in ruling on transparency which we summarise and categorise below:

 

Information/circumstances that should be considered:  

 

• the  wording of the term,
•  the information that the financial institution provided to the borrower, including mandatory information required by national law,
• advertising in relation to the type of agreement entered into, by taking into account the level of attention which can be expected of an average consumer who is reasonably well informed and reasonably observant and circumspect.
•  promotional material provided by a financial institution on the type of agreement entered into.

Information/circumstances that may be taken into account:

 

•     Information that the financial institution is required to provide to the potential borrower in accordance with national legislation; in general, the information that the financial institution has given to that borrower in the negotiation of an agreement on the contractual terms and the consequences of entering into that agreement
•    Attention which the average consumer pays to a term relating to an arrangement fee, In accordance with the case-law, account must be taken, in the context of that assessment, of the level of attention which can be expected of an average consumer who is reasonably well informed and reasonably observant and circumspect.

 Information/circumstances that should not be considered: 

•         The onsumers’ general knowledge of a term unconnected to the way in which such a term is drafted in the context of a particular agreement. The fact that such a term is well known is not a factor that may be taken into consideration in assessing whether that term is plain and intelligible,
•         The wording, location, and structure of a term justify the finding that it is an essential element of the agreement (at least in this case because it leads to an incorrect assumption that it is an essential term). 

Does the arrangement fee cause a ‘significant imbalance’ under Article 3(1) UCTD?

 

The final question to the CJEU was whether the arrangement fee could be considered under Article 3(1) as directly affecting the contractual balance in the parties’ rights and duties to the detriment of the consumer.

 

Referring to Kiss and CIB Bank (C‑621/17), the CJEU clarified that unless the services provided in return (the arrangement fee in this case) do not reasonably relate to services provided in connection with the management or disbursement of the loan, or the amounts charged to the consumer in respect of those costs and that fees are disproportionate to the amount of the loan, in principle, it would not cause significant imbalance. However, this would have to be verified by the competent court in each individual case based on the facts of the case.

 

On the same grounds, a contractual term governed by national law that establishes an arrangement fee to remunerate services relating to the examination, constitution, and personalised processing of an application for a mortgage loan, does not appear, subject to verification by the court having jurisdiction, capable of adversely affecting the legal position of the consumer, unless the services provided in return do not reasonably fall within the scope of the services described above or the amount charged to the consumer in respect of that fee is disproportionate to the amount of the loan.

Finally, the CJEU emphasised that national court practice that would simply declare that a term is not unfair because it is based on the applicable national law would be contrary to EU law and the UCTD, as it would prevent national courts to carry out, including of their own motion, an examination of the potential unfairness of the terms concerned in accordance with that provision and, consequently, would fail to ensure the full effectiveness of the UCTD. This final point, the point that caused uncertainty in Spanish judicial practice, is somewhat surprising. First of all,  it seems to go against one of the founding principles of law according to which special rules prevail over general rules (lex specialis derogat legi generali). Secondly, it would have been useful to consider the ‘mandatory terms’ exception here under Article 1(2) UCTD. 

No colouring outside the lines for national courts (exchange rate risk in consumer loan contracts) - CJEU in AxFina Hungary (C-705/21)

On April 27th the CJEU issued another judgment in the saga of consumer loan contracts denominated in a foreign currency, AxFina Hungary (C-705/21). It discussed further consequences, pursuant to Articles 6 and 7 UCTD, of finding unfair such terms that place the exchange risk on the consumer, when the loan is denominated in a foreign currency, but consumers repay it in the national currency.

This case concerned a smaller consumer law (ca 7k Euro) taken out to purchase a vehicle and repayable over 10 years. The loan was denominated in Swiss francs and repayable in Hungarian forint. Hungarian court declared invalidity of this loan contract on the basis of the unfairness of the term imposing the exchange rate risk on consumers. On appeal the referral was made to assess the compliance with EU consumer law of current Hungarian practices regarding unfair terms in consumer loan contracts. Namely, as paras 17-19 explains, following Hungarian Supreme Court's non-binding position, Hungarian case law tended to declare consumer loan contracts with unfair terms on exchange rate risk 'temporarily applicable' - until the date the judgment was issued. This means that the contract is terminated for the future, but not seen as having been invalid in the past. When removing 'the cause of the invalidity' courts would either convert the loan into Hungarian forints (removing entire exchange risk) or set a ceiling on the exchange rate risk (removing part of exchange risk). 

Declaring loan contracts valid and amending their terms: Not a default

The CJEU is clear in condemning Hungarian case law practices: If a term places exchange rate risk on consumers and as a result is declared unfair, which leads to invalidity of a loan contract, this contract cannot then be declared valid and have its terms amended by courts. It does not matter whether the amendment would change the currency of the loan or of the interest rate or set the ceiling on the exchange rate (para 50). The court recalls the previously raised arguments on the need to assure the dissuasive effect of the UCTD by not allowing national courts to modify unfair contract terms (paras 38-41). The previously adopted exception, for when invalidating a contract due to unfairness would expose consumers to particularly detrimental consequences, and where there is a possibility to replace the unfair term with a supplementary provision of national law, still stands (para 42). If such supplementary provisions do not exist, national courts could still help consumers facing detrimental consequences of contract's invalidity, e.g. by inviting parties to negotiate new terms, within the framework set by national courts (para 46) or by ordering repayment of sums wrongly received by the lender on the basis of the unfair term as unjust enrichment (para 48). But national courts, in their efforts to protect consumers from detrimental consequences, cannot go beyond what is 'strictly necessary' to restore contractual balance.

This is perhaps just a reiteration of the previously declared rules (mainly in Lombard Lizing and Banca B, see here on the latter), but it is a needed repetition. This in light of the tendency of national courts to still try to colour outside the lines set by the CJEU in cases related to consumer loan contracts denominated in foreign currencies.

Substituting unfair exchange rate terms with supplementary provisions

Further, the CJEU reiterated Dziubak (see here) and stressed the narrow scope for what constitutes supplementary provisions, with which national courts may replace unfair exchange rate terms in consumer loan contracts. This substitution may only happen in exceptional cases, i.e. when consumers face 'particularly unfavourable consequences' (para 52). Further, such provisions cannot be of a general nature (para 55), as they had to be adopted to specifically address the need to restore the balance between the parties (para 54). This also means that  such supplementary provisions need to 'usefully replace the same term by a mere substitution by the national court which does not require action on the part of that court that would amount to revising the content of an unfair term in that contract' (para 56).