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 

CJEU rules on excessive fees in consumer contracts (C‑321/22, Provident Polska)

Last Thursday, the Court of Justice delivered another interesting ruling on unfair terms in consumer credit contracts. The focus this time was not on mortgage loans, but on credit agreements for relatively low sums, often concluded by consumers in financial distress. The judgment deals with three separate issues: 1) the scope and interpretation of the fairness test; 2) the principle of effectiveness as applied to the proof of an interest in bringing legal proceedings; 3) consequences of finding a term unfair, i.e. invalidity of the term vs. invalidity of the entire contract. The focus of this comment is on the first and the last point.

 

Facts of the case

 

Case C‑321/22, Provident Polska, involved three consumers who concluded credit contract with a non-bank credit institution. The contracts were quite similar: in each case the loan amounted to less than 2000 EUR and the interest rate was between 7.2% and 10%. The dispute was not about those sums, however, but about non-interest costs, which could be almost as high as the amount loaned. The relevant costs included a 'disbursement commission', 'administrative charges' as well as non-optional 'flexible repayment plan fees'. In addition, the amounts were payable only in cash in hand to an agent of the lender during visits made at consumer's home.

Fairness test

Contrary to first intuitions, the focus of the case was not transparency (although it does come up later in the judgment). Rather, what the referring court wanted to know was whether a term which provides for payment of amounts which are manifestly disproportionate to the service provided may be unfair. And, in short, the answer of the Court was yes (kind of).

Now, there are several issues to unpack.

Significant imbalance

First, can a "significant imbalance in the parties' rights and obligations arising under the contract" (Article 3(1) UCTD) at all be established on the basis of an quantitative economic evaluation, involving a comparison between the total value of the transaction and the costs charged to the consumer? According to the Court, it can.

Such a perspective differs from the focus that the Court normally takes in its UCTD case law. As a typical passage goes: "a significant imbalance can result solely from a sufficiently serious impairment of the legal situation in which the consumer (...) is placed" (para. 45). To establish such an imbalance a comparison needs to be made between the rights and obligations of the consumer under the contract and the relevant rights and obligations under otherwise applicable national rules. However, as the judgment in Provident Polska prominently shows, the reference to "resulting solely" does not mean that there can be no other source of a significant imbalance, but rather that a "legal imbalance" is sufficient. Thus, an imbalance of rights and obligations can also be established on the basis of a quantitative economic evaluation (para. 47).

Article 4(2) UCTD

Of course, this does not mean that all contract performances can now be analysed for fairness by comparing the value of the transaction to the costs charged to the consumer. Nevertheless, this follows not from the concept of a "significant imbalance", but rather from the exclusion in Article 4(2) UCTD. Pursuant to this provision

assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.

The exception from Article 4(2) consists of two parts. The first one relates to the terms defining the "main subject matter of the contract". Not all fees charged by the trader are captured by that notion. For example, commission fees covering remuneration for services connected with the examination, grant or treatment of the loan do not (para. 51). The second part, however, is more relevant for our context and provides little space for assessing performances in economic terms. As noted by the Court:

terms relating to the consideration due by the consumer to the lender or having an impact on the actual price to be paid to the latter by the consumer thus, in principle, fall within the second category of terms covered by Article 4(2) of Directive 93/13 as regards the question whether the amount of consideration or the price as stipulated in the contract are adequate as compared with the service provided in exchange by the lender (para. 52).

Does it mean that excessive fees can never be assessed for fairness? Not quite. The Court is offering three ways out. The first two are well-known: minimum harmonisation (Article 8 UCTD) and transparency (Article 4(2) UCTD in fine). The third suggests that one cannot speak of assessing the adequacy of the price/remuneration as against the services or goods supplied, if no goods or services are supplied at all. In the words of the Court:

[I]f the unfairness of such a term is alleged before the national court on the basis of the lack of any actual service provided by the lender that could constitute consideration for a commission fee that it provides for, the issue thus raised does not concern the adequacy of the amount of that commission fee as compared with a service provided by the lender, and does not therefore fall within the scope of Article 4(2) of Directive 93/13 (...) (para. 54).

Overall, there are quite some hurdles to finding excessive fees unfair, but it is not impossible. The formulation of the Court's response is rather telling:

[P]rovided that the examination of the possible unfairness of a term relating to the non-interest costs of a loan agreement concluded between a seller or supplier and a consumer is not precluded by Article 4(2) of [the UCTD], read in conjunction with Article 8 thereof, such a term may be held to be unfair as a result of the fact that that term provides for the payment by the consumer of charges or a commission fee in an amount that is manifestly disproportionate to the service provided in exchange.

Partial removal of the clause

Another question concerned payment arrangements. The national court was quite convinced that the term requiring the consumer to pay in cash during the agent's visits at his or her home was unfair. Such a term - the court observed - could only be explained by the possibility it offered the lender to exert emotional pressure on the borrower. However, the court was not quite sure about the consequences it should draw from finding the unfairness.

Part of the problem was that the term formed part of a longer clause, which also defined other payment arrangements, e.g. amounts and dates. The referring court was thus unsure if it can remove part of the clause containing the unfair term (about paying in cash to the agent), or if it should rather invalidate the whole term. Since the latter would result in the inability to enforce the contract, the question was raised if the whole contract had to be annulled.

The Court of Justice considered it possible to remove part of the clause containing the unfair term and keep the remaining part in force. At first glance, this may seem incompatible with its previous case law. Indeed, the Court repeatedly found that the UCTD precludes a term that has been found to be unfair from being maintained in part, with the elements which make it unfair removed, where that removal would be tantamount to revising the content of that term by altering its substance (para. 89). However, this has to be distinguished from a situation "where the unfair element of a term consists of a contractual obligation distinct from the other requirements and capable of being the subject of an individual examination of its unfairness (...) since the stipulation laying down such an obligation may be regarded as severable from the other requirements under the term concerned" (para. 90).

This seems quite understandable. A clause can consist of several terms and it should not be generally impossible to remove only some of them. In the remainder of the judgment, the Court attempts to help with this assessment by drawing a distinction between "ancillary terms" and the "substance of the terms". In the words of the Court:

[I]t appears that a stipulation determining such specific arrangements for the performance of the consumer’s payment obligation constitutes a contractual obligation distinct from the other stipulations of a single term, as described in the preceding paragraph of the present judgment, and is ancillary to the elements of the contract which define the substance of that term, such as those relating to the determination of the amounts to be paid and the dates on which those payments must be made. Furthermore, the deletion of that stipulation does not appear to be such as to affect the very substance of the term concerned, since the consumer continues to be obliged to perform his or her repayment obligation in accordance with the other conditions laid down in that term by choosing any method of payment from among those which are permissible under national law (para. 93).

The added value of this distinction is yet to be seen. Was it not enough to say, as the Court did previously, that a clause can contain several distinct requirements which can be separately assessed for unfairness and which, therefore, can be invalidated independently of each other? The distinction between the substance of the terms and ancillary terms suggests a hierarchy, but a single clause can also refer to apples and oranges. Overall, the outcome is certainly well-founded, but the case law on the consequences of finding unfairness is not the easiest one to navigate.

"Particularly unfavourable" consequences of unfairness and renegotiation - CJEU in C-645/22 (Luminor)

On 12 October, the CJEU decided on a slightly odd but in its way challenging case coming from Lithuania - Luminor (C-645/22). 

In this case, the consumer had objected to the interest rate clause in a foreign currency loan. The clause had been held unfair by the Lithuanian Supreme Court after some initial reticence in lower instance. The consumer's wish with respect to the fate of the unfair clause was to convert the currency reference into Euros. 

The court of appeals tasked with issuing a decision on the underlying dispute once the Supreme Court had decided that the term may be unfair drew the conclusion that the term was unfair and invalid - then it went on to an understandable but somewhat unusual move. Namely, the Court asked the parties to indicate how they would like the term to be replaced so that the contract could be upheld. The consumer insisted on their original claim - replacing the exchange currency with the Euro - while the defendant bank kept maintaining that the term was not unfair and the replacement not possible for want of applicable non-mandatory rules. The court of appeals went on to amend the contract as requested by the applicant and the defendant appealed. 

The case, hence, ended up once again before the Supreme Court, which upheld the finding that the term was unfair - but what about the consequences? The Supreme Court found that the court of appeals had not run all the steps prescribed by the CJEU's case law - namely it had not ascertained whether the consequences of invalidating the contract as a whole would be "particularly unfavourable" for the consumer. Only when this is the case, we should recall here, can courts consider further actions than just removing the unfair terms.

Was this step one that could under no conditions be skipped, the Supreme Court now asked? 

This wasn't a particularly open question, even though the Lithuanian courts seemed to think that acting immediately would be in line with the spirit of the Directive and CJEU case-law. The CJEU concluded, without AG opinion and with a reasoning that is not always entirely the clearest but is not surprising in its conclusions, that assessing whether the consequences of invalidating the contract would be "particularly unfavourable" for the consumer is a necessary step that national courts cannot set aside. Only when the prospect of such consequences is positively ascertained can further measures be taken - whether replacing the term by means of supplementary rules or "a provision applicable where the parties to the contract in question so agree" [see para 38]. This is also the case when the parties have made no submissions concerning the invalidation of the contract - the assessment of what consequences a terms' unfairness has for the contract must be carried out objectively under the applicable national law and this duty is not dependent on parties' submissions [para 37].

The Court does not touch on a further question that had been disputed between the parties but had not explicitly been included in the Lithuanian Supreme Court's preliminary questions: If the court invested with the dispute had found that the consequences of invalidating the contract would be "particularly unfavourable", what would be possible courses of action? Recent CJEU case-law has insisted that, when replacement by supplementary rules is not possible, courts must "take all measures" which are necessary to protect the consumer from particularly unfavourable consequences of unfairness - except by replacing the term [see para 34 with references to previous case-law]. What are these measures? The CJEU recalls that under its previous case-law such measures are "not exhaustive", but it is unclear whether what the Lithuanian Court of Appeals did - namely soliciting proposals form the parties and taking a decision itself - would fall within the admissible scope. How many more cases will it take until we figure this out? 

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).

Opening 2023 in style: CJEU C‑395/21, transparency of hourly fees in contracts for legal assistance

Dear readers, 

you may have noticed this already if your social media feed looks anything like mine: the CJEU has issued a decision on the transparency of lawyers' fee under Directive 93/13, which is all but sure to make us talk in the coming times. While the most remarkable element in the decision concerns the application of transparency to a new - and potentially quite ripe for expansion! - set of circumstances, the decision also further testifies to the CJEU's struggle to deal with its own strict approach to the consequences of unfairness under the Directive. 

So, to start with the facts: the case arose between a Lithuanian consumer and their lawyer and concerned several contracts concluded between the two. Each of the contracts included a relatively unsophisticated remuneration clause, according to which the client stood to pay 100 EUR per hour of work by the lawyer. 

After several years and a series of partial payments, it appears that a dispute had arisen between lawyer and client as to the amount of the overall fee - with the former asking for roughly double, in total, of what the client had paid until then. This controversy led to a court case, during which successive Lithuanian courts found the remuneration term unfair for its failure to provide the consumer sufficient clarity on the likely significance of their financial commitment. To make things worse for the lawyer, Lithuanian law (article 6.2284(6) of the Civil Code)  has implemented the transparency requirement "the German way", that is by specifying that terms can be deemed unfair for the sole fact that they are not transparent. The Lithuanian supreme court, thus, turned to the CJEU to know, in particular: a) whether indeed a term only indicating an hourly fee should be considered as lacking transparency; b) whether indeed they should follow the letter of Lithuanian law and consider that the term should be invalidated; c) what the consequences should be in such case, given the fact that the contract would obviously not stand without the unfair term. [other questions need not be addressed here]

As to the first question, which is also the most interesting, the Court [para 41] ]had to acknowledge that identifying and indicating with certainty what the final cost of legal services will be poses serious hurdles and cannot be expected of lawyers (interesting to think: what other professions could this apply to and how?); at the same time, it concludes, there can be several ways for the professional to provide the consumer, before concluding the contract, ways to estimate future expenses or anyway know how they can expect to be able to keep them under their purview. A mere indication of an hourly fee, without information as to the rough expected amount of hours to be invested or as to ways in which the consumer will be kept informed of the hours worked and fees due, does not comply with the transparency requirement. This is, according to the Court, necessary in order to allow the consumer to take a prudent decision. [paras 44-45]

As to the second question, it should surprise no-one that indeed, opting for a higher level of consumer protection is expressly allowed under the Directive and hence – while the Directive itself does not require terms lacking transparency to be declared unfair, it certainly allows for this consequence when so established under national law. [see paras 51-52]. This means that the court did not elaborate, in this case, on how courts in systems that do notautomatically connect lack of transparency and unfairness would have to go and investigate whether the term caused a significant imbalance, contrary to good faith, under the Directive’s article 3. 

As to the third question, finally, the Court reiterated its standpoints articulated in a vast (if complex) body of case-law: an unfair contract must be disapplied; when a contract cannot survive without the unfair term, the concerned court must consider whether the contract’s ocverall invalidity would cause a significant disadvantage for the consumer. Only in that case, the term can be replaced by “a supplementary provision of national law or a provision of national law applied by mutual agreement of the parties to those contracts. ”The provision in question, however, must be “intended to apply specifically to contracts concluded between a seller or supplier and a consumer and […] not so general in scope that its application would be tantamount to allowing the national court, in essence, to set, on the basis of its own estimate, the remuneration due for the services provided” [para 63]. Otherwise, the court says, it is ultimately to be accepted that the contract may be invalidated, even though that may entail some “legal uncertainty” – which I understand to open to an action for unjustified enrichment? In the case at hand, it appears that the national court may be able to identify a suitable provision, which leads me to close with an appeal to our Lithuanian readers: please keep an eye on this and let us know what the final bill was!

Trivia and curiosity aside, it seems to me (but I may be biased as I have argued it elsewhere) that the decision marks a new step towards transparency as determinacy or at least some constraint on uncertainty and arbitrariness. This move is enabled in particular by the Court’s relatively nonchalant use of parameters originally articulated in the specific context of variation clauses (Invitel, RWE, foreign currency loans etc) outside of their original context – see for instance para 37 in the decision, where the court recalls how transparency entails that the contract (in context) must set out transparently “the specific functioning of the mechanism to which the relevant term relate” – which in those old cases were all variation mechanisms, not at hand in this case.

This my first take of course – I must admit to not having checked AG Szpunar’s opinion yet, so there may be more to be said as to the first answer has come about, also in particular with reference to this last point. To be continued!

 

Of unfair terms, novation agreements and other not so magical creatures - CJEU in C-19/20

Dear readers, 

as the spring advances (not really, for those of us in continental Europe, but we keep faith), we should catch up with some case-law developments from the past weeks. 

Hereby, thus, a quick overview of a somewhat convoluted case decided by the CJEU on 29 April - IW v Bank BPH SA. After Dziubak, it is no surprise that more cases would be pouring in from Poland on the subject of credit in Swiss francs. 

In the case under discussion, the referring court was of the opinion that the consumers had been sufficiently informed about the risks associated with the mortgage contract, so that the main indexation interest was not unfair; however, within this mechanism, the bank had included an indication that the final cost to the consumer would incorporate a resale margin for the bank which was not further elaborated upon in the contractual documents. This left the bank unconstrained in determining such margin and the consumer unaware of what factors may affect the bank's determination.

The blank resale margin clause was later amended by means of an agreement between the parties which, according to the Court, established a sufficiently clear mechanism - thus "fixing" the term. 

While the consumers did not agree with the referring court's assessment of the main indexation terms, ultimately the questions for the CJEU all concerned the situation with regard to the resale margin mechanisms. 

The first question concerned the effect of the agreement amending the resale margin clause on the unfairness assessment: must a court exert unfair terms control in spite of the agreement? According to the Court, in substance, the agreement prevails when the consumers have signed it in full awareness of the fact that they were waving their rights to unfair terms control. Otherwise, the Court is supposed to assess the term and, where it finds it unfair, establish that the consumers are entitled to be put in the same position where they would have been without the agreement. 

The second and third questions concerned the admissibility of a finding that only the resale margin term should be invalidated, while leaving the rest of the indexation mechanism in place. Would such approach go against the CJEU-sanctioned prohibition of court revision of unfair terms? The Court does not give a final answer to this question, but instructs the national court to establish whether the resale margin determination can be considered as a "contractual obligation distinguished from he other contractual terms, capable of being the subject of an individual examination of its unfairness" [para 71]. The removal should not, on the other hand, remove an unfair element within a term, altering "the substance" of such term [para 80]. This is an interesting question in fact: on the one hand, it is obvious that the combination of indexation and resale margin was, taken together, the mechanism through which the cost of credit was fixed. On the other hand, the clause determining the bank's resale margin could very well be separately set at zero, without - as the referring court observes, creating a gap. This sounds, at first appraisal, like a question that would be best addressed in legislation. While the referring court mentioned the existence of legislation dealing with the unfair term in the MS, this legislation, which was passed after the contract was entered into, is in essence irrelevant to the dispute according to the CJEU.

The fourth question is more straightforward and concerns the consequences of finding that the resale margin term was unfair: when should the contract be invalidated? According to established case-law by the CJEU, whether a contract should be held in place after a finding of unfairness depends on whether, under national law, it is capable of continuing to function - based on an objective assessment and thus not on the subjective position of one of the parties [90]. The referring court wondered whether the contract's invalidation had a sanctioning character and to what extent the consumer's preference played a role, to which the court replied by summarising its case-law to the effect that the judge must first determine the consequences of unfairness on the contract and then, when relevant, allow the consumer to decide whether they prefer invalidation of the contract or maintaining the unfair term.

The fifth and final question went into the referring court's role with respect to the consumer's choice between invalidation and preservation of the unfair term: should the court actively inform the consumer about their options and the implication of their choices, or could this function be entrusted to the consumer's legal representation when they have one? The CJEU's answer in this respect is very clear: since it is upon the court to make sure that the consumer's rights in the procedure are respected, and in particular that their decision in respect of the outcome of unfair terms control is the result of "free and informed consent", the court must also inform the consumer about their choices [95].

Nothing in this decision comes particularly as a surprise. The more difficult points, ultimately, go back to the referring court who needs to decide whether the consumer has in fact waived the term's invalidity via the novation agreement and, if not, must assess whether the resale margin mechanism can be severed from the overall indexation mechanism (and, if not, must decide on the future of the contract). Unlike in Dziubak, it is not obvious in this case that the consumers would gain from the contract's overall invalidation, which could or could not add to the case's complexity. Curious what the Polish colleagues in the blog team may have to say on this case!

Unfair terms and supplementary rules after Dexia (Joined Cases C‑229/19 and C‑289/19): rolling a dice?

Dear readers, 

it has taken a while to figure out what made me puzzled at the Dexia decision which the CJEU rendered two weeks ago, but now I managed to put my finger on it. The decision concerns "share leasing" contracts, a speculative instrument whereby consumers - by and large - acquire shares from a bank and return them after some time, possibly making profit if the share price has (sufficiently) risen in the meantime. The contract made provisions for the case of early termination which essentially made it very likely for Dexia to make actual profit from such an event rather than just compensate its costs and missed gains. The combination of terms giving rise to such consequences was in principle declared unfair by the Dutch Supreme Court, leaving lower courts with some concerns.

On its face, despite the complexity of the underlying contracts, what the two Dutch courts had asked the CJEU was to more or less restate the (precedent-wise) obvious: 

• is a term which establishes a significant imbalance between the rights and duties of the parties, to the consumer's disadvantage, also to be considered unfair when on certain occasions it may (somewhat unexpectedly) turn to the consumer's advantage? (Yes)
• can a court replace a non-essential term of the contract which has been declared unfair by applying supplementary rules of national law? (No, unless for some reason said national law makes the contract invalid without the term and this is to the consumer's disadvantage). 

After looking back, there is indeed nothing new under the sun as concerns the first question: the Court had explained several times in the past (since Banco Primus at least! thanks @Anna van Duin for digging this up), and clearly repeats here, that a term's assessment under the unfair terms directive cannot depend on circumstances which will only emerge after the contract's conclusion. Rather it must be assessed in light of the way it affects the parties rights and duties, seen at the moment the contract is entered into. As the court states at para [57], a different conclusion would undermine the term's invalidity as mandated by the Directive's article 6, allowing courts to only disapply unfair terms when unfavourable circumstances arise while leaving them otherwise in place. 

So far, so good. Dutch courts, in fact, love to disapply rather than invalidate terms, so we can understand how the constellation at hand would require extra persuasion on the side of the Court of Justice - next to, let us be honest, the fact that the terms had been used in a vast number of contracts. 

Now, on to the the second question, which turns out to be a bit more complicated. The Hague court of appeals asked whether, after invalidating the terms in the agreement, it could apply rules of general contract law allocating damages arising from termination of a contract between the parties to determine the respective position of Dexia and its client as a result of the termination.

We do know since Kásler that courts can only replace an unfair term with a national supplementary provision when the contract would be invalid otherwise (and this would be to the consumer's disadvantage). However, what is a supplementary rule? from Kanyeba we know that general rules on damages do not count as supplementary rules and can thus be applied instead of a penalty clause - subject of course to the claimant invoking them and providing that they suffered damages. Furthermore, in Caixabank, the Court had recently validated the application of statutory rules on the allocation, between parties, of necessary notary fees. It had done so, notably, without even referring to its case-law, just apparently finding it plain that this must be possible. What, thus, distinguishes the rules in Dexia from the ones which were considered applicable in Kanyeba and Caixabank?

It seems that the rules allocating contractual damages in this case, and in particular the way that they had been operationalised in case-law, establishing that damages would be as a rule split 2/3-1/3 between bank and consumer, fulfil most closely the notion of supplementary rules of national law that has been implied in the case-law so far. They are clearly rules of contract law, they are non-mandatory, and indeed they supplement not only the contract but also general rules on damages. Not applying them, also (contrary to what would have happened in Caixabank), does not leave a problematic gap. They just make the consumer's situation more advantageous. 

The feeling remains, however, that we are still not done with this kind of questions. With national courts still struggling on questions as apparently moot as the first one in this case, how can we expect any clarity on an objectively more complicated matter? If the CJEU keeps showing no willingness to help by looking more systematically at its own case-law, we can expect more confused national courts to ask for help in the coming times. 

Restoring an effective balance through court-guided negotiations? CJEU in Banca B.SA v A.A.A (C-269/19)

 Dear readers, 

if you were hoping for some inspiring CJEU news to keep your mind away from pandemics, impending festivities and other disasters, we may this week have just what you were looking for - or not, but only time will tell :)

Yesterday, the CJEU's first chamber delivered a judgement sparked by the creativity of Romanian courts which could make courts in other Member States take a closer look at their potential role in unfair terms dispute. To understand the case, it is useful to take a small step back.

As you may remember, in a string of cases culminating famously in the Dziubak decision, the court had established that unfair terms may not be replaced unless two+1 conditions are fulfilled:

a) the contract must, under the applicable national law, not be capable of existence without the unfair term 

and

b) the invalidity must be to the consumer's disadvantage. 

If these two conditions apply, the term may be replaced with otherwise applicable non-mandatory rules - the existence of which is a third condition. What if there are no otherwise applicable rules?

In the case at stake, Romanian courts were struggling with exactly this problem. While on occasion, as in Dziubak, a consumer may actually prefer the whole contract to be invalidated, in several Romanian cases courts were left alone with the prospect of invalidating contracts or facing a stalemate. Some courts had sought to apply non-mandatory rules which had entered in force at a later stage and were thus not applicable to the contentious contracts, but other courts had decided to instate "regulated" negotiations between the parties. In its decision, the CJEU endorses - and, to a certain extent, even requires, this approach, making space for a new wave of procedural innovation in unfair terms adjudication. To what extent this will materialise, though, will of course depend on a number of factors, including importantly national legislation. Let's see what the court says. 

According to the CJEU, the Directive's article 6 does not seek to "prescribe uniform solutions" after a term has been declared unfair [see para 39]. However, once it has found a term unfair, the national court invested with the dispute must, "while taking into account all of its national law, take all the measures necessary to protect the consumer from the particularly unfavourable consequences which could result from the annulment of the loan, notably the fact that the seller or supplier could immediately claim the debt from the consumer" [para 41]. 

The above means that, in circumstances such as the ones at stake, nothing precludes a court from instating negotiations between the parties in order to establish a viable method for calculating the interest rate "provided that it sets out the framework for those negotiations" and that the negotiations themselves seek to establish "an effective balance" between the parties' rights an obligations, considering in particular the objective of consumer protection underlying the Unfair Terms Directive [see para 42]. In doing so, however, they should keep in mind that their intervention should not go beyond "what is strictly necessary to restore the contractual balance", which in turn means "to protect the consumer from the particularly unfavourable consequences" that annulment would bring about. A more substantive intervention would undermine the achievement of the paramount objectives pursued by the directive, namely restoring equality between the parties and deterring professionals from using unfair terms [para 44, para 38] 

Combined, the elements in the reasoning seem to suggest not only that the Directive does not preclude the instigation of "regulated" negotiations, but even that courts are required to take action in this way when this is allowed [or not prohibited] under the applicable national rules. While the CJEU's caveat against substantive intervention leaves open questions as to what courts should do in case negotiations stall, the decision seems mainly aimed at moderating the possibly harsh effects of the case-law which came to be epitomised in Dziubak while preventing consumer-unfriendly readings which some MS courts may be a bit too eager to embrace. 

CJEU in Kanyeba: "contract of transport" and the scope of Directive 93/13

Dear readers,

last week the Court of Justice rendered a decision of some consequence in the field of unfair terms - which was to an extent unexpected in light of the somewhat less conclusive AG Opinion published before the summer.

In Kanyeba, the CJEU had to decide on the applicability of Directive 93/13 to the legal relationship between a passenger who had boarded a train without paying a ticket and the railway operator: was this a matter of contract law or, given the fact that the consumer was seemingly not intending to pay the price, a matter or administrative regulations? Under Belgian law, authoritative court decisions had clarified that unfair terms control should apply in either scenario. The referring court, however, seemed to disagree: whether the Directive applies, it reasoned, is a matter of EU law and should thus be clarified by the Court of Justice.

The Court's answer suggests that the Directive does, in principle, apply. This descends from the fact that, according to the Court, Regulation No 1371/2007, which defines certain essential rights of passengers of train transport services, must be interpreted to mean that a contract to transport under the Regulation (and hence, it seems, for purposes of consumer protection) is concluded as soon as a passenger boards a train with the intention to travel - irrespective of whether they have a ticket or whether they intend to purchase one. This conclusion, according to the CJEU, is warranted both by the wording and context of article 3(8) of the Regulation and by the consumer protection goals. The latter would be undermined, the court says, if consumers were exposed to losing all protection as soon as they boarded a train with no ticket. 

The finding may not mean much in the case at stake as the Court observes that the terms and conditions featuring the terms under consideration in Kanyeba - some very steep penalties for failing to buy a ticket in time or pay an extra charge - may quite possibly be exempted from unfair terms control under article 1 of the UCTD, which safeguards national statutory or regulatory provisions if they are applicable irrespective of the parties' will. 

Of probably broader interest - if in itself not incredibly surprising - is the answer given in this case to a further question raised by the referring court: if the penalties were to be found unfair, would the court be allowed to "replace" them by means of general tort law?

The Court's answer comes in two instalments, which I think must be separately considered: 

1) in para 74 the Court reiterates that the Directive precludes "that a national court replace that term, in accordance with the principles of its contract law, with a supplementary provision of national law"; however, a little above the Court reasons that

2) the question whether circumstances such as those at issue in the main proceedings are, moreover, capable of falling within the ambit of the law governing non-contractual liability does not come within the scope of Directive 93/13, but of national law.

The Directive, the Court says, does not seek to harmonise non-contractual liability. Hence, we seem to understand, it does not pre-empt claims in torts by the seller concerning the same circumstances which the penalty clause would have applied to. 

This conclusion makes very good sense and could help clarify some questions that scholars in various Member States have been grappling with in the past few years. In particular, I think it is safe to read two implications into this decision: 

a) a national court cannot decide, so to say ex officio, to grant damages on the basis of general rules to a party who was seeking to enforce an unfair term;

b) however, the Directive does not preclude awarding of damages when the claimant makes a relevant submission and fulfils all the conditions for granting such a claim as established by national legislation. 

While the comparative lawyer in me would have loved it for the Court to engage in a more general analysis on the notion of contract under the UCTD, I think this is a very balanced decision which deals well with a number of relevant issues without excessively muddling the waters or hiding away.