CJEU on Buy Now Pay Later (C-409/23): not consumer credit unless it is

Not that fresh, still hot: last month, the CJEU issued a remarkable decision in Case C-409/23 (Arvato), a preliminary ruling request from the Dutch Supreme Court concerning so called "buy-now-pay-later" (henceforth: BNPL) schemes and their qualification in the context of European consumer credit rules. 

While payment in instalments, with our without intermediaries, has been around for a pretty long time, not all European consumer markets are equally permeated BNPL schemes, which are very popular and common - for instance - in the Netherlands. In these schemes, consumers can conclude online transactions in a webshop and only pay at a later stage, when they receive an invoice by a third party that takes up the invoicing and provides payment security to the seller. If this reminds you of a credit card, that's not odd at all: these services essentially aim to provide services akin to those of a credit card, without the long-term credit contracts (and eligibility controls) associated to traditional models. Some, in fact, even go as far as to provide an own app-environment through which consumers can reach web shops. 

In return for these services, BNPL companies sometimes charge sellers/service providers a fee; they usually also charge consumers a small - even nominal - fee. According to consumer advocates, however, a significant portion of their revenue comes from consumer non-performance, in the form of late payment interests and debt collection fees. Civil law courts are then confronted with claims aiming to force consumers to pay their growing debts; in the Netherlands, many (but not all!) local courts have started to treat these contracts as credit contracts, even though officially in most cases the BPNL company has formally just been assigned the original credit by the seller. Why?

The advantage of considering BNPL as credit contracts is technical but also quite substantial: in many cases, Dutch courts are then able to invalidate the credit contract based on breach of core information requirements, leaving the consumer with, in essence, only the principal to pay. This is a particularly favourable outcome when, as is not rarely the case, the original purchase is only worth a small amount but the collection fees and default interest have been cumulating for a while. 

Whether BNPL should, under current rules, be considered a credit contract depends in no small part on how one interprets the "old" Consumer Credit Directive, which excludes certain transactions from its scope. In particular, Article 2(2)(f) of that Directive excludes contracts "where the credit is granted ‘free of interest and without any other charges’ or [...] under the terms of which ‘only insignificant charges are payable’". Dutch courts, however, have been considering the collection fees and late-payment interest as part of the cost of credit, making the contract (maybe free of interest but) not "without any other charges" or including only "insignificant charges". The Dutch Supreme Court was unsure whether this approach was in line with the Directive and asked the CJEU to solve the question for them - do default interest and out-of-court collection fees count as "cost of credit" in the context of assessing whether a credit contract has been entered?

The Court of Justice answers the question over a succinct few paragraphs: first (para 44), it notes that the letter of the law points to "interest" and "other charges" to only be relevant when "provided for at the time of conclusion of the credit agreement". This suggests excluding default interest and collection fees because "the non-performance by a consumer of his or her payment obligation and the duration of any such non-performance are, in principle, unforeseeable at that time". Second (para 46), considering such interests and charges as part of the cost of credit would largely hollow out the exception established at article 2(2)f since only contracts providing absolutely no consequence for non-performance by the debtor would be covered. Hence, in principle where credit is provided for free or against a negligible fee the fact that fees and interests will have to be paid in case of non-performance does not turn the relationship into a credit contract under the Directive. 

However, the Court observes (para 49-50), both the Dutch government and the referring Court suggest that default interest and collection fees are to be considered integral part of the provider's business model; the Directive, at the same time, requires Member States to make sure that its provisions cannot be circumvented "as a result of the way in which agreements are formulated". In light of the above, national courts have to make sure they guarantee the effectiveness of the Directive, and in particular

ascertain whether, in reality, the creditor is seeking to circumvent its obligations under Directive 2008/48 by anticipating, from the time the credit agreement is concluded, the non-performance by the consumer of the payment obligation in order to seek an economic advantage from the latter’s liability for interest and default charges. To that end, it will be for that court to examine all the circumstances present at the time when the agreement in question was concluded and other relevant information, such as, inter alia, the statutory or contractual origin of the interest and default charges, the periods within which that interest and those charges become payable and the amount of that interest and those charges.

This is a difficult task for national courts. Pending a decision by the Dutch Supreme Court, our sources suggest that local courts are reacting in different ways: some are just assuming that they can go ahead with treating the contracts as consumer credit; other courts are asking BNPL providers additional information about their business model in order to ascertain whether they do, indeed, plausibly expect a significant percentage of "their" customers to incur late payment fees; some are de-prioritising affected cases while awaiting a result, and some others, finally, are assuming that the CJEU's decision means BPNL is not credit after all. 

The uncertainly is naturally limited in time - the article 2(2)h in the Consumer Credit Directive 2023 explicitly limits the exemption to cases in which deferred payment is offered by the provider of the underlying good or service, with the exclusion of commercial third parties; however, it is also rather consequential for all actors involved - providers, debtors and courts.  

Who is the average consumer? CJEU in Compass Banca (C-646/22)

On the 14th of November, the CJEU published its long-awaited decision on Compass Banca (Case C-646/22; we have previously discussed it here). In this case, the CJEU, for the first time, elaborated on who the ‘average consumer’ is, especially in light of the persistent critiques from behaviouralists, and further clarified the assessment of and the consequences for unfair commercial practices under the UCPD (Directive 2005/29/EC).

The case involves a commercial practice by the Italian company Compass Banca which the Court termed ‘framing’ – a term typically associated with a specific type of cognitive bias rather than a concrete commercial practice. Namely, Compass Banca presented an offer for a personal loan alongside an unrelated insurance product, leaving consumers with the impression that it was not possible to obtain the loan without taking out the insurance. In particular, there was no cooling-off period between the signing of the two contracts. Even though Compass Banca claimed that it was made clear to consumers that the loan was not contingent on the insurance, the Italian consumer authority requested a seven-day cooling-off period to be granted and, upon Compass Banca’s failure to comply, found the practice of framing an ‘aggressive’ and thus ‘unfair’ commercial practice under the UCPD. Compass Banca challenged this decision in court, which invited questions reaching the CJEU.

The CJEU’s ruling

The first question concerns the extent to which behavioural insights about individuals’ cognitive biases should inform the concept of the ‘average consumer’, a notion that lies at the heart of the UCPD as a benchmark for assessing the effects of a particular commercial practice on consumers’ decision-making processes. Such an explicit reference makes this (abstract and somewhat academic) question not merely ‘hypothetical’ and justifies its admissibility (paras 37-39). Probably unsurprisingly, however, the Court avoided adopting academic terms like ‘homo economicus’ and ‘bounded rationality’ which were used by the referring court. This, of course, does not really make a difference to the substantive reasoning.

With reference to recital 18 of the UCPD (which came from the Court in the first place), the Court restated that the ‘average consumer’ is an individual ‘who is reasonably well-informed and reasonably observant and circumspect, taking into account social, cultural and linguistic factors’. The CJEU highlighted the nature of the ‘average consumer’ as an objective criterion which is independent of any specific consumer’s knowledge, but ‘not statistical’, which nonetheless allows national courts to take into account ‘more realistic’ considerations when exercising their own faculty of judgment to determine the ‘typical reaction of the average consumer’ (paras 48-51, recital 18 UCPD). With this understanding, the Court continued to clarify the two prongs of the average consumer benchmark: ‘reasonably well-informed’ and ‘reasonably observant and circumspect’. (I read it as the former relates to obtaining information/its availability, while the latter to processing information/its effectiveness.) As to the former, in view of the trader’s mandatory information obligations, it should be understood as ‘referring to the information which can reasonably be presumed to be known to any consumer, taking into account the relevant social, cultural and linguistic factors, and not to the information which is specific to the transaction in question’ (para 52). The lack of information is thus not excluded from the assessment of the effects of a commercial practice. Here, I think the Court was indicating that being ‘reasonably well-informed’ does not require consumers to actively seek out material information that the trader is legally obliged to provide.

Similarly, the nature of being ‘reasonably observant and circumspect’ does not exclude considering the influence of cognitive biases, should such biases be likely to affect a reasonable average consumer to materially distort their behaviour (para 53). The Court then recalled its several cases which acknowledge that an average consumer may be deceived, may have varied levels of attention regarding different goods and services, may be subject to an erroneous perception of a piece of information and may be simply unable to understand the technical details in certain transactions (paras 54-56). While these cases were usually discussed as ‘deviations’ from the average consumer standard, the Court used them as ‘evidence’ to confirm that a ‘reasonably observant and circumspect’ consumer is not a perfectly or particularly observant and circumspect one (adverbs used by AG Emiliou in para 42). Nonetheless, the Court cautioned that the existence of constraints like cognitive biases does not automatically make them legally relevant and decisive in finding an unfair commercial practice: ‘it is still necessary for it be duly established that, in the particular circumstances of a specific situation, such a practice is of such a kind as to affect the consent of a person who is reasonably well-informed and reasonably observant and circumspect, to such an extent as to materially distort his or her behaviour’ (para 57). There seems to be a high bar for courts to apply behavioural insights. In all, the Court concluded by sticking to the classic definition of a rational consumer while accepting the possibility of constraints that can impair consumers’ decision-making capacity, such as cognitive biases.

The second question concerns whether the practice of ‘framing’ in this case is in all circumstances aggressive or at least unfair. First, the Court found that framing is not categorically blacklisted in all circumstances, since it does not correspond to any practice listed in the ‘complete and exhaustive list’ of Annex I (para 68). Second, the Court indicated that neither can framing be found aggressive, in most cases, when applying the general test under Art. 8 UCPD: there is no ‘harassment’ and ‘coercion’ in their usual meaning in daily language (para 72), and there is no ‘undue influence’ as framing ‘does not, as such, imply the existence of acts of pressure, even if that practice is likely to create a bias of framing’ (para 75). Third, it is still possible that a non-aggressive practice can be a misleading one in the sense of Arts. 6-7 UCPD. In this case, the Court noted that framing leaves consumers with the (misleading) impression that it was impossible to get a loan without taking out the insurance (para 80) – though Compass Banco has claimed otherwise (para 82). Ultimately, it is for national courts to assess the unfair nature of a commercial practice (para 83).

The third and fourth questions ask: Should framing be found unfair, do the UCPD and Art. 24(3) of Directive 2016/97 on insurance distribution preclude the national authority from requiring a cooling-off period to be granted in order to put an end to the unfair practice? Regarding Directive 2016/97 the question was answered negatively, as Art. 24(3) only requires the possibility of buying a good or service separately without the ancillary insurance (as a package). As to the UCPD, the Court held that while it precludes ‘a general or preventive obligation to comply with a certain cooling-off period’ in an ex-ante manner (para 91), it does not preclude national authorities’ ex-post ‘power to issue directions to that trader’ once there has been an established unfair commercial practice (para 92). However, the measure taken cannot restrict the freedom to provide services (per Art. 4 UCPD) and must respect the rights codified in the Charter of Fundamental Rights, in particular the freedom to conduct a business under its Art. 16 (paras 94-95). In this light, the principle of proportionality mandates that a measure is only acceptable when ‘there are no other equally effective means of putting an end to that practice which are less prejudicial to the freedom to provide services and the freedom of the trader concerned to conduct his or her business’ (para 96). In short, requiring a cooling-off period is fine, unless there are less intrusive alternatives. Here, the Court took a rather constitutionally informed approach to the enforcement of consumer protection, though one might wonder why consumer protection itself (Art. 38 of the Charter) was not brought to the balancing exercise.

Comments

This case adds an interesting (but definitely not conclusive) annotation to the controversial notion of the ‘average consumer’. The Court wants to keep the baby and the bathwater: the average consumer is indeed ‘observant and circumspect’ (which receives heavy criticism) but only ‘reasonably’ so (which allows considerable leeway and flexibility). While the Court stressed that its analysis was specifically made ‘within the meaning of [the UCPD]’, its reasoning would most likely have broader implications as the average consumer benchmark is creeping into other consumer instruments. 

To some, the Court has said nothing new in this case – nowhere in EU law has it ever committed to interpreting the average consumer as ‘homo economicus’. To others, this decision may be celebrated as a victory for behavioural law and economics. However, the wording of the decision suggests (‘an individual’s decision-making capacity may be impaired by constraints, such as cognitive biases’) that cognitive biases are not the decisive nor the only factors that can ‘impair’ a consumer’s decision-making capacity. (Here, I would prefer ‘influence’ over ‘impair’ as we don’t want to reinforce ‘observant and circumspect’ and marginalise ‘reasonably’.) Indeed, while behaviouralists have commendably challenged the predominant information paradigm for better consumer protection, it has been pointed out that their critique lacks a social dimension – how choices are shaped not only by our individual cognitive capacities but also by our interpersonal interactions, social practices, cultural preferences and institutional set-ups. In this regard, the Court made reference ‘to the fact that a loan applicant is normally in need, to the complexity of the contracts presented for signature by the consumer, to the concurrent nature of the combined offer and to the short period granted to take up the offer concerned’ (para 80) – which appears to be a list of factual and contextual factors that should be considered when ascertaining how ‘reasonably observant and circumspect’ the average consumer should be in this case. And this list clearly goes beyond cognitive biases (so does the list by AG Emiliou in para 40).

In any case, determining the average consumer’s typical reaction should not be reduced to an empirical exercise solely aiming for a realistic approximation of real-life consumer behaviour, even with the help of behavioural science and even AI. This is clear in recital 18 of the UCPD (‘in line with the principle of proportionality’, ‘taking into account social, cultural and linguistic factors’, ‘not a statistical test’) and from the Court. Instead, delegating national judges ‘to exercise their own faculty of judgement’ ultimately asks them the normative question of how much protection should be afforded to the consumers in our political economy. So if we take this normative dimension seriously, we can explore other ways to flesh out the benchmark beyond what was discussed in this case. But then, to what extent should realistic considerations inform this normative assessment? And what assumptions, insights, frameworks, theories or imaginaries should serve as the normative guideline for judges to fill in the definition? 

Like it or not, the average consumer is here to stay, and the debate is certain to persist. How ‘reasonable’ the average consumer should be expected to be, what and who should inform this definition, and therefore what the desirable level of consumer protection should be – these questions will continue to puzzle academic debates, judicial reasonings and even political processes. 

Price reductions to be determined on the basis of the ‘prior price’ (C-330/23 Aldi Süd)

 Guest post by Laura Bakola (PhD candidate at Leiden University)

In September the CJEU issued a judgment on price indications and the obligation of the trader to announce a price reduction on the basis of the ‘prior price’ of the product. The case comes after the amendment introduced by Directive 2019/2161, as regards the better enforcement and modernisation of consumer protection rules (hereafter Omnibus Directive), to Directive 98/6 on consumer protection in the indication of the prices of products offered to consumers (Price Indication Directive, hereafter PID). According to the amendment, any announcement of a price reduction shall indicate the prior price applied by the trader for a determined period of time prior to the application of the price reduction (Article 6a(1) PID); the prior price means the lowest price applied by the trader during a period of time not shorter than 30 days prior to the application of the price reduction (Article 6a(2) PID).

The case involved a supermarket chain which had issued an advertising brochure containing product offers. One of the brochures contained price indications that were presented in the following manner:

Concerning the first price indication, a percentage was used, but the reduction was not determined on the basis of the lowest price charged in the trader’s stores in the 30 days prior to the offer, the latter being the same as the selling price. Concerning the second price indication, the statement ‘price highlight’ was used, while indicating a higher price than the lowest price charged in the 30 days prior to the offer. Against this background, the questions asked by the referring court pertained to the interpretation of Article 6a(1) and (2) PID; namely, whether these provisions require that a price reduction announced by a trader in the form of a percentage, or in the form of a promotional statement intended to highlight the advantageous nature of the announced price, must be determined on the basis of the ‘prior price’, within the meaning of Article 6a(2) PID.

According to the Court, although Article 6a(1) PID does not make it possible to determine whether the price reduction must be calculated on the basis of the prior price, as defined in paragraph 2 of that Article, account should be taken of the Directive’s objectives, as well as the specific objectives pursued by the provisions in question (paras 20-21). As regards the objectives pursued by the Directive, these are the improvement of consumer information and facilitating comparison of the selling price of products, in order to enable consumers to make informed choices (Article 1 and Recital 6 PID); the selling price of products must be unequivocal, easily identifiable and clearly legible, so that that information is precise, transparent and unambiguous (Article 4(1) and Recital 2 PID). Furthermore, both the Omnibus Directive and the PID were intended to achieve a high level of consumer protection (Recital 1 Omnibus Directive and Recital 2 PID). Interpretation of Article 6a PID as meaning that it suffices to mention the ‘prior price’, without using it as the basis for calculating the price reduction, would undermine the aforementioned objectives, in particular that of improving consumer information (para 24). As regards the specific objectives pursued by Article 6a PID, these were intended to prevent traders from deceiving the consumer, by increasing the price charged before announcing a price reduction and thus displaying false price reductions (para 25). Mentioning the ‘prior price’ for mere information purposes, without using it as the basis for calculating the price reduction, would undermine that specific objective, by allowing traders to mislead consumers through price reduction announcements which are not real (para 26).

It follows that the selling price of a product in a price reduction announcement cannot be the same as the ‘prior price’, within the meaning of Article 6a(2) PID, or be higher than it (para 27). The Court also clarified (para 28) that assessment of a commercial practice consisting of displaying a price reduction, which is not determined on the basis of the ‘prior price’, will be made with regard to the relevant PID provision and not the provisions of Directive 2005/29 on unfair commercial practices (UCPD). Article 6a PID specifically regulates aspects linked to price reduction announcements, thus constituting lex specialis in relation to the UCPD.

In light of the above, the Court ruled that Article 6a(1) and (2) of the PID must be interpreted as requiring that a price reduction of a product announced by a trader in the form of a percentage, or in the form of a promotional statement intended to highlight the advantageous nature of the announced price, must be determined on the basis of the ‘prior price’, within the meaning of 6a(2) PID.

The judgment in case C-330/23 Aldi Süd is a welcome ruling, clearing up the interpretation of Article 6a(1) and (2) PID. However, as business practices evolve in response to regulatory changes, problematic price promotion techniques are not expected to cease. The onus is then on enforcement authorities to ensure application of the rules, thus achieving transparency of price indications in consumer markets.

New rules on authorised push payment fraud in the UK

Yesterday was a big day for UK consumers when the new rules on compensating victims of authorised push payment fraud (APP fraud) came into force.

APP fraud is when consumers are tricked into sending money to the fraudster. It can happen in various ways, e.g. via impersonation fraud, romance fraud or email takeover fraud. The point is that the consumer makes the transfer of the money (and therefore the transaction is authorised by the consumer), and this fact differentiates the type of fraud from others where the consumer does not consent to the transaction e.g. when the consumers' bank card is stolen and is used for purchases (unauthorised transaction). APP fraud is the most prevalent fraud in the UK, and in Europe. The number of consumers affected increases year by year.

UK reforms started under the pressure of the consumer group Which? by submitting a Super-Complaint to the Payment Systems Regulator, noting the increasing prevalence of APP fraud and calling for rules to tackle the problem. They pointed out that the general rule of shifting the liability for the loss from the consumer onto the bank applied to all unauthorised transactions, but it does not apply to authorised transactions, and they argued that there are no legitimate reasons for maintaining this exception.

In 2019 the Contingent Reimbursement Model Code was adopted. This voluntary code was signed by most major retail banks. However, although the Code established the desired main rule, it had numerous exceptions, such as effective warnings and gross negligence. After a while, it became apparent that the Code was not as effective as it could be, and the Government decided to take action. The Financial Services and Markets Act 2023, in Section 72, deals with the payment service provider's liability for fraudulent transactions, empowering the Payment Systems Regulator to bring rules in the area. These rules (PSR Specific Direction 20) entered into force yesterday:

• the new rules apply to all payment service providers, not just banks
• the rules protect individuals, microenterprises and charities
• rules apply to UK domestic payments only using the Faster Payment System
• the rules provide for mandatory reimbursement except when consumers were complicit in fraud or grossly negligent, the Regulator, however, clarified that the gross negligence exception is a high bar and does not apply to vulnerable consumers
• firms can choose to have a £100 excess (except in the case of vulnerable consumers)
• the maximum amount claimed can be £85,000, or firms can opt for a higher threshold internally
• reimbursement amount is shared 50-50 between sending and receiving bank
• there are set claims and reimbursement deadlines.

The new rules are certainly welcomed. APP fraud caused a lot of consumer detriment, and the lack of effective rules led to legal uncertainty. It is a positive development that there are much fewer exceptions in the new rules. However, exceptions and limits do exist, e.g. the rules do not apply to international transactions, and there is uncertainty about how the gross negligence exception will be enforced and who will be considered vulnerable consumers for the purposes of the exceptions. These nuances will need to be carved out by practice, and the Financial Ombudsman Service, which handles consumer complaints, is likely to play a key role.

Although these rules apply to UK domestic transactions only, they are helpful to know given the prevalence of APP fraud in other countries, including EU Member States and can be beneficial in developing PSD3. 

New IACL conference announcement - February in Montpellier

If you have missed this week's first European conference of the International Association of Consumer Law, do not worry, you will have a chance to share your research and exchange ideas with colleagues in the field soon again. On 27 and 28 February 2025 at the University of Montpellier (France) we will reconvene at the European Congress of Consumer Law. This congress will be bilingual, with some sessions held in English and some in French language (which means that you do not need to speak French to join and participate). The conference will celebrate the work of Professor Jean Calais Auloy and have two themed sessions (devoted respectively to consumer information and to new consumption habits and unfair practices), as well as one session on all other issues of consumer protection. The call for papers is below. Send in your abstracts by October 25.

Insolvency protection for cancelled trips amidst Covid-19: CJEU in HDI GLobal and MS Amlin Isurance (C-771/22 and C-45/23)

The immediate impact of the pandemic might be on the wane, but the legal battlefield continues. In HDI Global and MS Amlin Insurance (Joined Cases C-771/22 and C-45/23), the CJEU analysed the implications of insolvency on consumers’ right to a refund after validly cancelling a package trip under the Package Travel Directive (Directive (EU) 2015/2302).

In both cases, the consumers booked package trips with their travel organisers and paid in full. Due to the spread of Covid-19, the consumers cancelled their bookings on the grounds of ‘unavoidable and extraordinary circumstances’ as per Art. 12(2) of the Directive, entitling them to a full refund. However, the organisers became insolvent before issuing the refunds. Though Article 17(1) of the Directive does mandate the provision of security for insolvency protection, its wording seems to require a causal link between the non-performance and the organiser’s insolvency for the consumer to benefit. Questions thus arise as to whether its coverage should extend to those consumers who cancelled their trips before the insolvency occurred. Art. 17(1) reads:

Member States shall ensure that organisers established in their territory provide security for the refund of all payments made by or on behalf of travellers insofar as the relevant services are not performed as a consequence of the organiser’s insolvency. […] (emphasis added)

The CJEU first reiterated the methods of interpreting EU law: ‘account must be taken not only of its wording, but also of its context, the objectives pursued by the rules of which it is part and, where appropriate, its origins.’ Moreover, ‘where the meaning of a provision of EU law is absolutely plain from its very wording, the Court cannot depart from that meaning’. (para 56) The CJEU then continued its reasoning in accordance with this formula.

Starting with the wording. The term ‘relevant services’ can only cover ‘travel services’, or it can indicate a broader scope, covering other services such as refunds (paras 58-59). Due to this ambiguity, the wording of Art. 17(1) does not provide an absolutely plain meaning (para 60). The CJEU thus further engaged with the provision’s context, objectives and origins.

• Contextual interpretation: The CJEU interpreted Art. 17(1) of the Directive within its broader context, considering other paragraphs of the same provision, related provisions and the recitals of the Directive. In particular, Art. 17(2) of the Directive requires the security to be effective and to cover reasonably foreseeable costs (para 64). In light of recitals 39 and 40, the CJEU states that any refund of payment is a foreseeable amount of payment which may be affected by the travel organiser’s insolvency (para 68). Otherwise, the effectiveness of consumers’ right to termination under Article 12(2) would be compromised, and consumers would be dissuaded from exercising their rights (paras 69-70). Lastly, Art. 5 of the Directive requires the travel organiser to inform the consumer that ‘if the organiser … becomes insolvent, payments will be refunded’. This information would be misleading if Art. 17(1) excludes consumers’ refund claims arising before insolvency (para 73).
• Teleological interpretation: One of the main objectives of the Directive is to ensure a high level of consumer protection in EU package travel policy (para 74). In this light, given that Directive 90/314, the predecessor of the current Package Travel Directive, did not exclude travellers’ refund claims from insolvency protection, a restrictive interpretation of Art. 17(1) would constitute a reduction in the level of consumer protection (para 79).
•  Historical interpretation: The CJEU consulted the legislative history of Art. 17(1) but did not find it helpful (para 80).

Finally, the CJEU also highlighted that secondary EU law must be interpreted consistently with primary EU law as a whole, including the principle of equal treatment (para 82). This principle requires that comparable situations must not be treated differently unless objectively justified (para 83). The situations involved are (1) travellers whose package travel cannot be performed due to insolvency and (2) travellers whose refund claims following termination cannot be fulfilled. These situations are comparable because in both cases travellers are exposed to the financial risks entailed by the organiser’s insolvency (para 87), and there appears to be no justification for treating them differently (para 89).

In conclusion, the CJEU ruled that the security under Art. 17(1) applies to a traveller who has terminated the contract before insolvency but has not received the refund. Consumers can rest assured – while your trips might not go as planned, your refunds are secure. This decision will surely be welcomed by consumer rights advocates. Insurers are not too exposed either, as the ‘reasonable foreseeability’ criterion still serves to protect their interests.

Hidden plane defects and cancelled flights - CJEU in C-385/23 (Finnair) and C-411/23 (D.)

This June the CJEU issued two judgments analysing the scope of the application of the 'extraordinary circumstances' exception to airlines' scope of liability for cancelled flights, where cancellation was a consequence of a hidden plane defect.  

In Finnair (C-385/23) a relatively new plane (5 months old) had a failure of a fuel gauge, which became evident during refuelling shortly before take-off. Due to flight safety concerns the flight was cancelled and passengers only flew the next day, arriving at their destination ca 20 hours late. Investigation of the defect showed that even though this plane was the first one to experience this defect, all other aircrafts of the same type suffered from this defect.

In D. (C-411/23) the carrier has received a notification of a hidden design defect in the engine from its manufacturer together with a list of restrictions on the future use of an aircraft. A few months later, the defect manifested and the engine had to be sent out for a repair. Due to a global engine shortage, engine replacement was not possible for almost a week in that plane. This meant that the passenger's flight was delayed by more than 3 hours, as an alternative aircraft had to be used to operate the flight.

Manufacturer reveals design defect after the technical failure occurred

Finnair's case is a relatively straightforward one. The CJEU confirms that the 'extraordinary circumstances' defence from Article 5(3) Regulation 261/2004 on air passenger rights applies also when the manufacturer of a plane discovers the existence of a hidden defect after that defect manifested and caused harm. The time of recognising a defect as a hidden one is irrelevant, thus this recognition does not have to precede the occurrence of a technical failure. While dealing with consequences of technical failures could normally be seen as falling within the normal exercise of airlines activity and within their control, the CJEU has previously recognised an exception for hidden manufacturing defects of planes (paras 30, 33-35).

Carrier's knowledge of the design defect before the technical failure occurred

Similarly, in D. the CJEU recalls previous case law on when technical failures may amount to 'extraordinary circumstances', i.e., when hidden design defects manifest themselves, as these are not inherent in airlines' normal activity and remain beyond their actual control (paras 34, 36-38). It then also stresses the irrelevance of the timeframe in which the manufacturer reveals the existence of a hidden defect to air carriers "since that defect existed at the time of the cancellation or long delay of the flight and the carrier had no means of control to correct it" (para 40).

This is an interesting conclusion, as we could have anticipated that if air carriers are informed about one of their aircrafts belonging to a class of planes with a hidden design defect, they would then have (some) control on the follow-up steps: repair or replacement. Taking remedial measures would also remain consistent with the objective of assuring a high level of flight safety (para 41). 

This brings us to the second part of Article 5(3) Regulation 261/2004 which only releases air carriers from their liability if they took 'reasonable measures' when extraordinary circumstances occurred, i.e. "conditions which are technically and economically viable for that carrier" (para 44). The CJEU leaves it to the national court to determine whether all reasonable measures have been taken by the carrier, both after the notification of a hidden defect and after this defect manifested itself (para 48). This could have included the airlines' capability (financial and technical) to have this engine repaired while replacing the grounded aircraft with a chartered one or by fitting a replacement engine in it (para 50). Alternatively, if this was viable, the airline could have arranged for a back-up fleet or aircraft and crew on standby (para 51). What the CJEU does not consider a reasonable measure is the airline resizing its operations just in case of a hypothetical occurrence of a defect (para 52).

7th Annual Consumer Law Scholars Conference - call for papers

The next CLSC conference will be held in Boston, March 6-7, 2025. Anyone interested in participating in the East Coast edition of this conference should keep busy this summer and send their abstract in by September 6. See for further details the conference website (click here).

One size fits all? Average consumer in collective proceedings, CJEU in C‑450/22

 Dear readers, 

it is with genuine excitement (albeit with some delay) that I type out some thoughts in reaction to a very rich new decision by the CJEU, namely Caixabank and others of 4 July 2024 (C‑450/22).

This case is, shockingly but not incredibly, yet another instalment in the floor clauses saga that we have so often written about. It is especially salient, however, both in that it delivers additional insight in the relationship between the national and European dimensions of the story, and in that it decides important points of law in the still relatively underdeveloped area of collective proceedings. 

Our readers will remember the story: in 2013, the Spanish Tribunal Supremo (TS) declared that commonly used “clausolas suelo”, or “floor terms” which made sure that interest rates in variable interest rate mortgage contract would, counterintuitively, never change below a certain minimum rate – were unfair. The case subsequently reached the CJEU when the same TS tried to limit in time the effects of its judgement - which the CJEU (in its 2016 Gutiérrez Naranjo case) decided it was not the TS's call to make. Years later, the controversy is not over since affected consumers are still trying to recover unduly paid interests.

What was this specific preliminary ruling application about, though? The TS was invested with questions of law concerning a very large cease-and-desist cum damages lawsuit against, eventually, circa one hundred banks. The dispute followed declarations that floor terms included in many contracts were non-transparent and unfair under the Spanish rules implementing the Unfair Terms Directive. Spanish courts had previously found that this unfairness occurred, in particular, when the terms considered were presented in particularly misleading ways - hidden, framed by terms that looked like they reduced their impact, and so forth. The defending banks, however, questioned the rather wholesale application of the transparency test - was it not supposed, according to the UTD and CJEU case law, to be carried out having in mind the specific circumstances of each individual case? How could it be applied, in collective proceedings, to clauses in different contracts, offered to different customers, with different variations of the overall contract drafting?

This question was asked at two levels: first, as to whether in general the idea of collective proceedings for transparency did not clash with the possibility to assess on a case-by-case basis; second, whether in the specific case of this dispute, concerning contracts offered to very different segments of the consumer mortgage markets, it would not be misplaced to apply the same "average consumer" standard to assess all the concerned terms. Ex ante, the first question would have looked moot to an informed observer; the second seems to me less obvious, even though the Court seemed to find it relatively easy to answer. We will look at those questions in order. 

In the first question, the court had to consider whether transparency assessment under the UCTD could be carried out "in the context of a collective action brought against a large number of sellers or suppliers operating in the same economic sector, and concerning a very large number of contracts."

In answering this question, the Court acknowledged that in individual proceedings, assessing whether a term meets the transparency requirement requires considerations of the circumstances surrounding the conclusion of the individual contract. This specific feature of the assessment can obviously not be transposed to collective proceedings. The rest of the test, however, can be transposed. In this sense, national courts will have to assess

"in the light of the nature of the goods or services which are the subject matter of the contracts concerned, whether the average consumer, who is reasonably well informed and reasonably observant and circumspect, is in a position, at the time the contact is concluded, to understand the functioning of that term and to evaluate its potentially significant economic consequences. To that end, that court must take into account all the standard contractual and pre-contractual practices followed by each seller or supplier concerned, including, in particular, the drafting of the term in question and its position in the standard-form contracts used by each seller or supplier, the advertising employed for the types of contract concerned by the collective action, the dissemination of generalised pre-contractual offers aimed at consumers and any other circumstances which the court might consider relevant in order to exercise its power of review with regard to each of the defendants"

The national court, thus, will have to apply the average consumer test to a range of different practices and different actors. This can make the litigation complex, but, according to the Court, does not make collective proceedings non-viable as long as they meet the two requirements set in the directive's article 7(3), namely that they concern similar terms used or recommended by operators or associations of operators in the same sector. A different interpretation would plausibly undermine the whole construction of collective proceedings under the provision. 

So far, so good. The next part of the answer, however, may prove a bit trickier in the future. The second question, the Court said, required essentially to consider whether the average consumer, "who is reasonably well informed and reasonably observant and circumspect" can be used as benchmark to assess the transparency of a term (or similar terms) used in multiple contracts "where those contracts are aimed at specific categories of consumers and that term has been used for a very long period of time during which the degree of awareness of that term was developing." (para 47)

In the case under consideration, the referring court had observed that the concerned contracts had been concluded, over a long period of time, by "consumers who had taken over mortgage loans concluded by real estate developers, consumers coming under social housing finance programmes or public housing access programmes according to certain age brackets, or consumers who had obtained loans under a special scheme on account of their profession" (para 51). 

According to the CJEU, however, it is "exactly the heterogeneity" of the public concerned that makes recourse to the "legal fiction" of the average consumer necessary in order to be able to assess the terms in collective proceedings. (para 52). In contrast, it is possible that different assessments concerning the transparency of a term at the time of concluding the contract could have to be made because of supervening events alerting the general public to the significance of certain terms - here, the floor clauses. National courts can take this into account, to the extent that such a change in perception could be documented on the basis of "concrete and objective evidence" rather than "inferred from the passage of time alone" (para 55).  The judgement recalls that, during oral proceedings, the objective event or matter of common knowledge could consist in the collapse in interest rates, characteristic of the 2000s, which led to the application of the floor clauses and therefore to consumers becoming aware of the economic effects of those clauses, or in the delivery of judgment No 241/2013 of the Tribunal Supremo (Supreme Court) of 9 May 2013, which found that those clauses were not transparent" were suggested as possible relevant moments - it is then for the referring court to ascertain whether such events would have led to a change "over time, in the level of attention and information of the average consumer at the time a mortgage loan agreement was concluded." (para 56). 

The follow-up of this case will be interesting to observe for at least two reasons: on the one hand, the question of what specific developments can be considered to have generated a change, in the degree of attentiveness, alertness or information, relevant to how an average consumer would have understood a certain clause requires a degree of fact-finding that is partially at odds with the abstracting ideal of the average consumer. It also leaves national courts, and potentially lower courts, considerable leeway – especially given the limited reviewability of matters of fact in many jurisdictions. 

 

Second, while instrumental to an overall logical conclusion here – safeguarding the Directive’s explicit indication that collective proceedings should not be confined to entirely homogeneous terms and contracts – the idea that the target consumer doesn’t matter for applying the average consumer test seems to contradict the spirit of the Unfair Commercial Practices directive, which the average consumer notion is ultimately borrowed from. In that context, namely, article 5(2) declares unfair a practice that is likely to affect the economic behaviour of the average consumer or “the average member of the group when a commercial practice is directed to a particular group of consumers” -the so-called “targeted consumer” benchmark. Why would the referring court not be expected or be able to consider these different targeted consumers? Besides being potentially at odds with the UCPD, this insistence on abstraction seems to contradict the Court’s insistence that national courts can distinguish between what average consumers would understand before a certain event and what they would understand thereafter: if empirics matter in this case, why not with reference to targeted consumers?

Don't know about you, but I will be taking this question with me into my holidays! Hopefully many interesting developments to comment on after the summer break. Stay tuned 

Online safety and "vulnerable" consumers: the new OFCOM's draft codes of practice

The English Office of Communications (OFCOM) has recently released its new draft "Children's safety online" codes of practice in line with the Online Safety Act (OSA) the main act providing for online safety in the UK, which became law in October 2023. 

OFCOM is responsible for enforcing the OSA. Its draft codes of conduct are meant to complement it and to suggest platforms (especially, social media) how to shape a safer environment, with a focus on underage consumers. Accordingly, the guidelines encourage platforms to be stricter in setting up adequate procedures for age-checking, to provide users with the due instruments to report harmful content, to remove it when necessary, and to clarify the systems used to monitor and moderate online content, particularly with respect to young people.

Platforms ought to take measures based on their size, the purpose of their services, and the risk of harm to children. Thus, the Online Safety Act adopts a risk-based approach, similar to the European Digital Services Act (Regulation EU, 2022/2065). The purpose is indeed the same: ensuring that online service providers implement procedures that are able to tackle the threats to online safety while safeguarding users’ privacy rights and freedom of expression. The two acts therefore cover issues such as content moderation, and other generative AI outputs, such as deep fakes. They both show the increasing attention placed by lawmakers on new forms of digital vulnerability, and how to address them.

OFCOM’s choice to enact codes of conduct is in line with the European approach, too; in fact, the EU lawmaker has also emphasized the relevance of codes of conduct and soft laws in shaping a safer digital environment. The draft codes of conduct provide for transparency, placing on platforms the duty to make available to the public their risk-assessment findings, and providing systems to easily report illegal content. 

And the Agency has gone even further. Indeed, it has declared that it could even impose a ban on people under the age of 18 to access platforms that fail to comply with its guidelines. 

However, some questions arise from reading the new OFCOM document. Will the procedures for ascertaining the age of users lead to the collection of an excessive amount of personal data, violating the data minimization principle under the GDPR? Are OFCOM’s codes too restrictive if compared to the DSA, forcing platforms to adopt a “double standard” between users based in the UK, and those that are based in the rest of Europe? Is the Online Safety Act “technologically neutral” enough when differentiating platforms’ obligations on the basis of the content type or the most comprehensive approach adopted by the DSA, based on equal risk mitigation for all the illegal content, is to be preferred?

Despite these concerns, which undoubtedly will be further examined by many scholars and privacy advocates in the coming months, the guidelines seem promising for improving the online safety of English users, especially children. The true test will be their implementation and enforcement.

Transparency about online payments even if they are conditional - CJEU in Conny (C-400/22)

Last week, on May 30, the CJEU gave its judgment in the Conny case (C-400/22) elaborating on the requirement from Article 8 of the Consumer Rights Directive to clearly label an online obligation to pay on a website on a relevant button with the words 'order with obligation to pay' (or an equivalent of this).

Photo by Alice Pasqual on Unsplash

The facts of this case are interesting as it was a trader that tried to argue that the lack of clear wording on a website about an order with an obligation to pay should lead to the voidness of the concluded contract. The contract in case was a lease contract, concluded between a landlord and a tenant. Pursuant to German law, this lease contract had a ceiling on the rent that consumers had to pay and if this ceiling was exceeded, consumers could claim reimbursement of overpayments. Conny - a debt collection company - offered to collect the rent overpayments as an assignee of consumers rights. The contract between Conny and consumers was concluded online, via its website. Consumers had to approve T&Cs and click on a button to place the order, which button was not labelled with the required wording. The reason given for this was that the payment was conditional on Conny successfully securing the debt collection. Only at that time consumer would have had to pay a third of the annual rent saved, pursuant to T&Cs. The landlord used the lack of the proper labelling on Conny's website as an argument that the assignment of consumer rights was void and, that therefore, Conny could not have been successful in claiming repayment of rent from the landlord. 

Order with an obligation to pay - whether payment is conditional or unconditional

The CJEU clarifies, as expected, that the trader's obligation to transparently inform consumers concluding a contract through its website about an obligation to pay, just before a consumer binds themselves to this payment, does not change if the payment is dependent on satisfying a subsequent condition (para 56). This allows the consumer to explicitly acknowledge his consent to be bound by an online order with an obligation to pay (paras 43, 50). The CJEU points to the lack of distinction in the CRD between conditional and unconditional payments, as well as the duty to inform placed on traders when an order 'implies' an obligation to pay (paras 46-47). A different interpretation would have led to traders being able to explicitly inform consumers about their obligation to pay not at the ordering process, when consumers may still avoid the order and the subsequent payment obligation, but only at a time when the payment becomes due (para 52). Traders could then circumvent their duty to inform by placing in their T&Cs an objective condition, fulfilment of which would be required to lead to a payment obligation (para 53).

Sanction of voidability

An important clarification follows in paras 54-55 of the judgment. The CJEU emphasises the CRD's wording, which only states that a consumer is not bound by the contract in case the above-mentioned trader's duty has been breached. This does not need to indicate that a contract is void, but rather that a consumer has an opportunity to avoid it. This would make a significant difference in cases such as the one referred to the CJEU, when it is a trader who is trying to use an infringement of consumer protection rules as a 'weapon' against, ultimately, a consumer.

Delays in luggage loading a possible extraordinary circumstance - CJEU in Touristic Aviation Services (C-405/23)

On May 16, the CJEU issued a new judgment on air passenger rights when there is a long flight delay and an airline claims extraordinary circumstances, in the case Touristic Aviation Services (C-405/23).

In a given case, the flight was delayed by 3hrs and 49 min between Germany and Greece. The delay was a result of a perfect storm of various contributing circumstances: shortages of staff in both boarding the previous flight on this route as well as in loading the baggage on the plane, but also weather conditions worsening after the plane was ready for departure. At a glance, we could then say that at least some of these circumstances (weather) could qualify as extraordinary circumstances. The main issue in this case was whether the shortage of staff provided by the operator of the airport, rather than the airline, to load the luggage on the plane, could amount to an extraordinary circumstance. If yes, this would likely lead to a delay for which the airline was  not responsible, i.e.,  not exceeding 3 hours (not long enough for compensation under Regulation 261/2004). 

The CJEU's answer is not straightforward, unfortunately. There are two conditions that need to be met: the event not falling within the normal exercise of the airlines' activity and it remaining outside the airlines actual control (para 21). It refers to its previous case law on defects in refuelling systems at the airport as amounting to an extraordinary circumstance if the defect "is the result of a general failure", in that case in the refuelling system managed by the airport (para 23 - reference to case C-308/21, SATA International - Azores Airlines). The CJEU then advises the national court to check whether the shortage of staff for the baggage loading could amount to a general failure of baggage loading operations (para 24). What is missing here is an advice as to more precise parameters that would allow to lead to the demarcation of a general failure. Regarding the second requirement, whether the airline had control over the baggage loading operations could depend, per CJEU, on whether the airline could "exercise effective control over the operator of that airport" (para 27). Could this requirement potentially create a distinction between bigger and smaller airlines, as well as airlines who have their hubs at a given airport? Finally, the national court needs to examine whether the airline could have avoided this delay by taking all reasonable measures, which can e.g. mean using services of another baggage loading service provider (para 29). This again may depend on airlines' resources, leading to a further distinction between various airlines in avoiding having to pay compensation under Regulation 261/2004.

Overall, this judgment does not introduce more legal clarity by stating that a shortage of staff in luggage loading operations could constitute an extraordinary circumstance, but not being very directive on when this could occur.

New action by BEUC: Tamig Temu

We all like a good deal! However, those of us who know (a bit more) about consumer rights and consumer law are aware that cheap goods and services often come at a high price, by infringing our consumer rights.

TEMU, the online marketplace that has gained popularity in the EU, has recently came under the spotlight. This month, BEUC, The European Consumer Organisation, has taken a significant step by initiating an enforcement campaign against TEMU, named 'Taming Temu'. The campaign is a response to TEMU's violation of its consumer protection obligations under the Digital Services Act. The identified breaches include:

•   failing to provide sufficient traceability of the traders that sell on its platform and thereby to ensure that the products sold to EU consumers conform to EU law.
•   using manipulative practices such as dark patterns to get consumers, for example, to spend more than they might originally want to, or to complicate the process of closing down their account.
•   failing to provide transparency about how it recommends products to consumers.

BEUC filed a complaint with the European Commission, while 17 of BEUC’s members filed the same complaint with their competent national authorities. For a more efficient and effective enforcement action, BEUC asks the Digital Services Coordinators of each country (national authorities responsible for enforcing the EU’s Digital Services Act) to transfer the complaints to the Irish authority, TEMU’s country of registration. It would then be up to the Irish authority to take swift action to prevent further consumer harm.

Given the fast growth in the number of TEMU users, it is possible that the platform would pass the threshold of 45 million users per month, which would then classify it as a ‘very large online platform’ and grant the Commission competence to enforce the Digital Services Act.

Given that consumer law enforcement, especially against large platforms, was less effective in the past (see for instance our reports here and here), a concerted EU action is a welcome solution.

Blog team changes

Dear Readers, we wanted to update you on a few changes that have taken place in our merry blog team. After a few years of productive collaboration with Agnieszka Jabłonowska (Leiden University), she has decided earlier this year to give up this side project. It was a pleasure working with Agnieszka and we keep hope she may return to blog writing in the future. Since then, we have expanded our authors' team, thus you may shortly expect to see posts by new authors. Warm welcome to our three new contributors (in order of joining us): Marina Federico (Ca' Foscari University of Venice), Jie Ouyang (University of Groningen) and Dominik Dworniczak (EUI). 

Reversed burden of proof under strict conditions to exercise early repayment rights of consumer credit- the CJEU in C-326/22

Case C-326/22 Z  arose regarding Article 16(1) of Directive 2008/48/EC on consumer credit and the right to early loan repayment, which provides consumers with a right to repay their loan early and to the costs of the loan reduced accordingly.

The facts

Six consumers assigned to Z their claims regarding 15 consumer credit contracts that were repaid early, who intended to claim the total cost of credit reduction. However, under the applicable Polish law, Z needed to prove the claim's existence, which could have been only done by reference to the contract, but the consumers did not have the contract anymore. Consequently, Z requested access to the contracts, which the bank refused, saying there was no legal duty to do so. However, the referring national court rightly noted that the absence of such duty of the bank would lead to a contrary result to Article 16(1), which may, as in this case, effectively make the right to cost reduction unenforceable.

The legal question

The referring Polish court asked the CJEU whether Article 16(1), read in the light of the principle of effectiveness of EU law, must be interpreted as meaning that a consumer may request, from the creditor, a copy of that agreement and information concerning the repayment of the credit not featured in the contract when this is necessary to verify the calculation of the sum owed by the creditor connected to the early loan repayment right and for allowing that consumer to bring an action for the recovery of that amount.

The ruling

The answer was not apparent from the wording of Art. 16 (1). However, the CJEU noted that in interpreting the provisions of EU law, it is necessary to consider not only the wording but also the context of the provision and the objectives it aims to pursue, which is, achieving a high level of consumer protection.

Crucial is paragraph 26:

In that regard, it is relevant that Article 16(1) of Directive 2008/48 implies that the consumer is entitled to a reduction in the total cost of the credit, such reduction consisting of the interest and the costs for the remaining duration of the agreement, without needing to adduce evidence other than that of the early repayment of the credit. It follows that it is for the creditor to provide the information necessary to establish the amount of the reduction in the total cost of the credit to which the consumer is entitled.

If the information is unavailable in the contract, the creditor must provide that information to the consumer where it is necessary to calculate the amount owed by the creditor (para 27).

The CJEU ruled that Article 16(1) must be interpreted as meaning that a consumer may request, from the creditor, a copy of that agreement and all information concerning the repayment of the credit not featured in the agreement itself which is necessary for verifying the calculation of the sum owed by the creditor under the reduction in the total cost of the credit due to its early repayment and for allowing the consumer to bring a possible action for the recovery of that amount.

The approach was justified by the banks' duty to provide information to consumers via Article 10, which ensures a high level of consumer protection. This duty includes information to be incorporated into the contract and a copy of the agreement provided to the consumer. A credit agreement must be drawn up on a durable medium that should enable the consumer to easily access and store the information provided.

Our analysis 

This rare interpretation of Article 16 follows the only case so far (Lexitor). A seemingly very technical judgment on access to documents turns into a decision that establishes an important legal principle. The court effectively reversed the burden of proof in exercising the rights connected to early loan repayment. Depending on how we define the burden of proof, this might not technically be a reversal of the burden. However, it is based on the same idea of easing the burden of proof. This is based on an understanding that the consumer cannot access the documents and that this access is an essential condition for realising the consumer's rights. The judgment is a significant development, given that the burden of proof was only previously reversed in connection to Article 5 -providing evidence that the creditor complied with pre-contractual information duties (CA Consumer Finance). However, the reversal of the burden of proof here has important limits. It only applies when:

1)    the consumer does not have a copy of the credit agreement or if the agreement does not contain the relevant information, and

2)  the information is necessary for verifying the calculation of the sum owed by the creditor to reduce the total cost of credit due to its early repayment, and

3)   the information is necessary to allow the consumer to take action to recover the sum owed by the creditor. 

The question is whether the judgement will have a broader effect of reversing the burden of proof regarding Article 10 more generally. This seems to be the direction, but it is yet to be confirmed by further CJEU judgments.