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 