"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? 

Alternative terms on performance, average consumers... tune in to CJEU in mBank (C-139/22)

Claudio Schwarz on Unsplash

Today the CJEU decided another case on unfairness in mortgage loan agreements with an index-link to Swiss francs - in the Polish mBank case (C-139/22). The first part of the judgment is Poland-specific, as it refers to the validity and effect of a national register of unlawful terms, which Poland happens to have. This issue has already been considered in the previous Biuro case (see our comment on case C-119/15 here). The Court now reiterated that as long as the register is transparent, kept up to date, and the traders have an opportunity to question the applicability of the register in their particular case, national courts could benefit from such registers (paras 41-43). Hence, contested terms could be declared by national courts as unfair if their content has previously  been registered as unfair, provided that the court warns parties to the proceeding about this and gives the trader the opportunity to challenge this finding (para 45). 

The second question was more interesting: What happens if the mortgage loan contract contains a term that is likely to be unfair, however, it also contains another term, which allows consumers to disregard the unfair term and follow a different path for contractual performance? In this case, the contract included a term that obliged consumers to reimburse a loan index-linked to Swiss francs 'exclusively in the national currency as converted according to a rate of exchange freely determined by the bank' (para 52). This term was previously determined as unfair by Polish courts. However, the contract also included a term that allowed consumers instead to reimburse the bank directly in Swiss francs. This would allow consumers to choose where to obtain Swiss francs from, avoiding the conversion rates set by mBank. According to the bank, consumers could have then avoided the detrimental effect of the first term, which, again pursuant to the bank. would not lead to unfairness. The Court rightly rejects this argumentation. Contrarily, it emphasises that a contract containing such a mechanism - two alternative terms referring to the same obligation, one of which is unfair and one of which is lawful - per definition should be considered unfair (para 55). The trader could be seen as counting on consumers' 'lack of information, failure to pay due attention or a lack of understanding', which would lead them to re-pay the loan in the way set out by the detrimental, unfair term, with the other term then only providing a mechanism to avoid liability by the trader (para 55).

Interestingly, the Court makes the above-finding fully aware of the average consumer standard that applies to the interpretation of the UCTD provisions. On its basis, we could expect that reasonably well-informed and circumspect consumers, who are to read and attempt to understand the contract and its consequences, should recognise the better of the two options for re-payment. And yet... the Court does not think so.

The average consumer is mentioned by the Court when giving the answer to the third question: Does the fact that one of the borrowers worked for the bank exclude them from the scope of protection of the UCTD? The answer is: No. As the concluded contract does not pertain to the employment relationship, the sole fact that it is concluded with the employer does not mean that it could change its non-commercial purpose (para 69). Further, even if the consumer in this case had insights into exchange rates of mBank, which were not available to consumers not working for this bank, this did not mean that their 'more specialised' knowledge should exclude them from the scope of protection of the UCTD. The CJEU reminds that we refer to the objective benchmark of an average consumer and their knowledge. Thus neither less nor more consumer knowledge in a given case will matter (para 66).

Limits of unfair terms control, limits of harmonisation: CJEU in First Bank SA (C-593/22)

Is unfairness, like beauty, foremost in the eyes of the beholder('s Member State)?

Yesterday, the Court of Justice has decides a seemingly obvious case the systematic implications of which may be a bit more serious than they seem at first glance. In First Bank SA, the Court was asked to interpret the scope of application of Directive 93/13, in particular to the extent that its Article 1(2) declares that

"contractual terms which reflect mandatory statutory or regulatory provisions and the provisions or principles of international conventions to which the Member States or the Community are party, particularly in the transport area, shall not be subject to the provisions of this Directive." 

This is a more radical exclusion than the one dictated by Article 4 for core terms, which was inserted at a relatively late stage in the legislative process and in any event requires terms to be drafted in plain and intelligible language, in accordance with the same Directive's Article 5. 

The justification for this exclusion is a presumption in favour of national laws - the latter being trusted to have established a fair balance between the rights and duties of the parties to the contract. The exclusion of Article 1(2), in this sense, is an absolute presumption: As the Court has put it, the idea of a national fair balance is not a requirement for the exclusion, but just a rationale. Whether the legislatively established balance is fair or not does not really matter. 

Against this background, some Romanian customers tried to challenge terms in credit contracts that put all the risk for currency exchange fluctuations onto them. It appeared plausible, however, to claim that such terms were in line with a general provision in Romanian contract law expressing the principle of "monetary nominalism", namely the idea that the debtor always owes the amounts agreed in the given currency and not a specific value in terms of purchase power. 

Two questions were raised in this context: 1) whether the exception only applies when the contract terms literally reproduce legal provisions; 2) whether it matters, to the ends of applying the exception, that the consumer may have not understood that the term at stake was in fact equivalent to valid provisions of national law. 

Both questions were answered rather swiftly and without intervention of an AG. As to the first, the Court [see para 25] concluded that national courts must ascertain whether the clause at stake incorporates the same "normative content" as the corresponding provisions of national law; in that case, the terms can be assumed to "reflect" legal provisions, with no need for literal reproduction. 

Only slightly more interestingly, the Court dismissed the idea that understanding by the consumer may matter: relying on an unpublished order [see para 32], the Court clarifies that it has already once established that the professional's compliance with its disclosure and transparency obligations is not relevant to the ends of Article 1(2). This is ultimately the necessary implication of assuming that the exclusion must be interpreted objectively and not on the basis of parties' understandings. 

All in all, this is hardly a surprising decision. However, from a consistency perspective, it brings to the fore interesting questions concerning the tensions implied in the Directive's original choices - isn't it a problem [that this not-all-too-restrictive interpretation of] Article 1(2) further undermines the harmonising effects of the Directive? How does it fit with the role of transparency in respect of core terms? Is it acceptable that obviously extractive interest fluctuation clauses are assessed differently in the different Member States? 

In other words, if the Directive trusts both states (in respect of national rules) and private autonomy (in respect of core terms and price-service ration), why does the subjective understanding of the consumer not play even the least role in (applying) the exception? It looks like the stark reliance on the exemption rules as entirely formalistically interpreted and objectively applied reinforces the differences between Member States and takes the position of individual contractual parties in very little consideration. The reader will point to the obviously different formulation of the two provisions in Article 1(2) and 4 explained at the beginning of this post; whether a different formulation in the future would be acceptable to Member States and not end up diluting rather than improving consumer protection, in all honesty, is a prediction we will have to leave for another day.

PS In case you are wondering, immediate inspiration for today's title was provided by a paper written by my colleague Chantal Mak in re Gutierrez Naranjo a few years ago - also on dynamics of EU and national unfair terms rules. You find it on SSRN.

Suspending payments of monthly loan instalments for consumers awaiting finding of unfairness - CJEU in Getin Noble Bank (C-287/22)

Photo by Towfiqu barbhuiya on Unsplash

On June 15th, aside the Bank M judgment (see our previous comment here), the CJEU addressed Polish law implementing the Unfair Contract Terms Directive also in the case Getin Noble Bank (C-287/22). Also in this judgment the CJEU chose for a consumer-friendly interpretation of the UCTD, precluding national courts from dismissing a consumer's application for the grant of interim measures (namely, a suspension of the payment of the monthly instalments due under a loan agreement) when a decision on the invalidity of the loan agreement, due to unfairness of its terms, is pending. Such interim measures should be granted by national courts, if this is necessary to ensure 'the full effectiveness' of the invalidity decision. 

Polish consumers in the given case claimed unfairness of terms in a loan agreement converting the loan amount into Swiss francs at the purchase rate fixed by the bank, with monthly instalments repayable in Polish zlotys at the Swiss francs sale rate, also unilaterally fixed by the bank. What interests us, and the courts, however, is that in their claim they asked for the following interim measures being granted: 1) suspension of the obligation to pay monthly instalments until the final judicial decision; 2) prohibiting the bank to issue consumers with a notice of termination; 3) prohibiting the bank to publish any information that the applicants are in default on their loan payments during this time. The first sought measure could help with the improvement of the financial situation of consumers, who are likely to await the first court's decision for min of 2-3 years (para 53). The second measure would prevent the bank from taking punitive measure as a result of consumers' pursuing their claims. The third measure would not allow the bank to tarnish consumers' credit score.

Polish law allows to grant interim measures only when there is a 'legitimate interest' of the applicants in them, which amounts to showing that "the failure to grant interim measures would prevent or seriously impede the enforcement of the forthcoming judgment in the main proceedings or the achievement of the purpose of the proceedings in that case" (para 19). Polish courts have so far not been willing to recognise the existence of such an interest in Swiss francs loan cases, due to either of the following: 1) invalidity of a contract as a result of unfairness not leading to enforcement; 2) the need for interim measures to help avoid consumer harm, which could e.g. occur if the bank was in a poor financial situation; 3) consumers possibly being required to repay the loan capital when unfairness and invalidity is declared, which means that their continued payment of monthly instalments would be beneficial to them, limiting the final repayment amount (para 20).

The CJEU first refers to the past judgment in Aziz case (see our comment on it here), recalling that it already precluded national law from not allowing to grant interim measures to consumers awaiting a declaration of unfairness (and its consequences), when interim measures were necessary to ensure that the final national judgment is effective in protecting consumers (para 41). In Aziz case the interim measures were related to staying enforcement proceedings when consumers defaulted on paying their mortgages, which in Spain led to accelerated proceedings of mortgage enforcement.

Further, it reminds that in the case Fernández Oliva and Others (joined cases C-568/14-570/14 - see here) it considered granting of interim measures as necessary to protect consumers from the risk of paying higher than necessary monthly instalments during lengthy judicial proceedings (para 42).

As, pursuant to Polish law, consumers may only claim repayment of monthly instalments already paid at the moment of bringing an unfairness claim to court, this means that without the interim measures, they would need to bring a second claim to courts after succeeding in the first one (para 22). They would also be obliged to pay legal costs for the second time (para 50). The CJEU highlights that such an application of Polish law would make at least partially the forthcoming final decision ineffective, as it would "not have the effect of restoring the legal and factual situation of that consumer in the absence of that unfair term" (para 48).

Importantly, it is up to national courts to consider how likely the finding of unfairness is in a given case. If there is sufficient evidence of unfair terms, the removal of which could lead to invalidating the contract, plus there is evidence that consumers are likely to overpay banks without courts granting interim measures - the latter should be awarded (para 59).

Upon unfairness of mortgages, banks may suffer financially - CJEU in Bank M. (C-520/21)

Last Thursday the CJEU issued a much-awaited judgment in the Polish case Bank M. (C-520/21), another case dealing with the fallout of mortgage loans concluded by consumers in a foreign currency. This time the questions asked by the national court pertained to the consequences for the parties of the court declaring the whole contract null and void. When a mortgage loan contract is invalidated, it is clear to the referring court that that parties need to reimburse the sums payment (the bank should receive the loan principal, consumers - monthly payments, fees, commissions and insurance premium). But could other sums be claimed, mainly on the basis of unjust enrichment under national law? For example, could consumers claim from banks interest on the amounts they overpaid over the years, due to changes to currency exchange rates? Could banks in turn claim from consumers interest on the sum of money they were not able to otherwise invest as they provided it as a loan principal? Polish banks have indeed threatened consumers pursuing the unfairness of mortgage loan terms by asserting claims against consumers in such cases on the basis of the non-contractual use of the capital (Banki pozywaja frankowiczow, by przerwac bieg przedawnienia). 

The court relies heavily in its opening statement on the previous judgment in the case Gutiérrez Naranjo and Others (see our comment here), recalling the importance of the restitutory effect of the declaration of unfairness: Consumers must be brought back to the position (legal and factual), they would have been in if the unfair term had not existed (paras 61, 65). The second important function of the consumer protection against unfairness is to deter sellers and service providers from imposing unfair terms on consumers. National law then, in order to be compliant with the UCTD, needs to facilitate restoration of consumers to the position they would have been in if not for unfairness, as well as needs not to undermine the deterrent effect of the UCTD (para 68).

In this light, if national laws facilitate consumers claiming additional compensation from banks than the reimbursement of the monthly sums paid etc, this should not undermine the objectives mentioned above. To the contrary, such legal options may enhance the deterrent effect of the consumer protection framework against unfairness (paras 69-71). The Court recalls the need to adhere to the principle of proportionality though, which means that national courts should assess whether consumer claims do not go beyond what is necessary to achieve the above-mentioned objectives (para 73).

The same reasoning could not be applied to assess the compliance of national laws allowing banks to claim further compensation from consumers than the reimbursement of the loan principal. Such a legal option would undermine the deterrent effect of the protective framework (para 76). It could also discourage consumers from seeking to complain against unfair terms, as it may be more economically beneficial to continue with the performance of a contract containing unfair terms (para 79). The Court is not dissuaded from concluding this by arguments raised by banks indicating the fragility of the financial market at the moment, as well as claims that consumers will be receiving their loans 'free of charge' (para 80). The Court falls back on the principle nemo auditur turpitudinem allegans (no one may rely on their own wrongdoing). As banks chose to use unfair terms in their mortgage loan contracts, they may not now complain that they will lose their profits (para 82).

This judgment follows previously issued AG Collins' opinion. It has been rejoiced in Poland, where banks started counter-suing consumers not only for the return of the loan principal but also for the compensation for its use during the loan period, before the mortgage contract is annulled. Banks generally estimated such compensation to equal at least 50% of the loan principal, which would seriously impede any consumers' winning claim as to unfair mortgage loan terms. Now, if only the Polish courts were given additional resources to actually be able to handle all these cases, so that consumers could find their redress in a timely fashion.

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).

Cancelling credit contracts due to unfair terms: when does the view of the consumer matter? A quick judicial recap in OTP Jelzálogbank (C‑932/19)

Yesterday the Court of Justice delivered its judgment in case C‑932/19 OTP Jelzálogbank, which like many previous cases dealt with unfair terms of foreign currency-denominated loans. The judgment largely reiterates CJEU prior case law - especially related to the possibility for national authorities to deem particular terms unfair and void and replace them retroactively with state-mandated provisions (see e.g. our previous comment on Dunai) and to the finding whether a contract is capable of continuing to exist without the unfair terms. An aspect of the judgment which is especially worth highlighting is the role of the consumer in the latter context.

Facts of the case

 

The case involved a Hungarian consumer who entered into several contracts for loans denominated in a foreign currency in 2007 and 2008. The loans contained terms which later proved very problematic, ultimately leading to a legislative action by the Hungarian legislature finding that terms establishing an asymmetry between the exchange rates applied when the loan was paid out and when the loan was repaid were to be void. Instead such unfair clauses were to be replaced by a provision intended to apply a single exchange rate, fixed by the National Bank of Hungary.

The consumer in the case at issue was not quite happy with the above solution and would rather have had the entire agreement cancelled. The consumer believed that this view found support in the CJEU decision in Dziubak, published in 2019. However, in the case at hand the Court did not quite share the consumer's opinion and instead reiterated prior case law related more specifically to legislative actions aimed at replacing terms deemed void. In doing so, the Court also recalled some limitations of such actions, remarked when courts can contuinue to review unfairness and remarked on the role of the consumer at the stage of finding whether an agreement containing unfair terms should be cancelled or not.

 

Judgment of the Court

 

When it comes to legislative actions mentioned above, attention should be drawn to the Dunai case. Here the Court found that, firstly, terms replacing unfair term under national legislation, in so far as they reflect mandatory statutory provisions, do not fall within the scope of Directive 93/13 in line with Article 1(2) of that directive. Secondly the Court observed that "in so far as the Hungarian legislature has remedied the problems connected with the practice relating to agreements containing a term relating to the exchange difference, by requiring the replacement of that term and by safeguarding the validity of the agreements concerned, such an approach corresponds to the objective pursued by the Union legislature in the context of [Directive 93/13 on unfair terms], namely to restore the balance between the parties while in principle preserving the validity of the agreement as a whole, and not to cancel all agreements containing unfair terms" (para. 40). 

While the Court had indeed made that finding in Dunai, and has now reiterated it in OTP Jelzálogbank, it is interesting to have a look at it once again in the light of recent judgment in Banca Transilvania. Here the Court explicitly found, disagreeing with the AG, that the fact that a balance between the rights and obligations of the parties has been struck does not constitute a condition for the application of the exclusion in Article 1(2) of Directive 93/13, but a justification for such an exclusion. In the present context, however, the question whether mandatory provisions aim to restore a balance seems more consequential. Such a dissonance can arguably be exaplained by the ex post nature of the intervention in the commented case and the Dunai judgment.

Nothwithstanding the above, the judgment in Dunai also contained an important caveat which the Court reiterated in OTP Jelzálogbank. Specifically, the Court recalled that Article 6(1) of Directive 93/13 does not preclude national legislation preventing the court seised from granting an application for the cancellation of a loan agreement on the basis of the unfair nature of a term relating to the exchange difference, provided that the finding that such a term is unfair allows the legal and factual situation that the consumer would have been in in the absence of that unfair term to be restored (para. 42). The consumer should, in particular, be provided with a right to repayment of the sums wrongly received by the sellers or suppliers concerned (para. 44).

Finally, the Court also made clear that any legislative action taken in respect of one term does not preclude the court from reviewing the unfairness of other terms of the contract, such as those relating to exchange rate risk (para. 45). Such a review can also lead to court to conclude that the contract is no longer capable of continuing in existance without unfair terms and should be cancelled in its entirety. The latter finding, however, cannot be based solely on a possible advantage for the consumer of the annulment of the agreement as a whole. The decision should rather be based on the criteria laid down in national law, and the situation of one of the parties to the agreement cannot be regarded, under national law, as the decisive criterion determining the fate of the agreement (para. 49). There is therefore a subtle, yet important, difference between the role of consumer's opinion in OTP Jelzálogbank and in Dziubak. In the former case, we consider an objective assessment whether the contract can continue in existence or not. In the latter, we speak about a situation when the court had already found that the contract cannot continue in existence without the unfair terms and the question is whether the entire agreement should thus be cancelled or rather gaps therein should be filled - here, following Dziubak, the view of the consumer remains decisive.

=> Blog updates: We will soon publish a wrap-up post about the developments in unfair terms case law over past months, signalling judgments we have not yet commented upon. Stay tuned!

Replacing unfair terms with supplementary rules - not a mission impossible? AG Kokott elaborates on Dziubak in C-81/19 Banca Transilvania

Amid the current crisis it is worth taking a step back in order to catch up on some of the ongoing cases before the Court of Justice. Case C-81/19 Banca Transilvania is one of such noteworthy disputes. On March 19th the Advocate-General Kokott issued the opinion in the case, addressing a number of important points concerning consumer protection against unfair terms in foreign currency loan agreements. The opinion engages with the scope of fairness assessment, focusing on the exclusions of the terms reflecting mandatory statutory provisions and conditional exclusion of core terms. It further elaborates on the legal consequences to be drawn by national courts if a term governing the exchange rate risk is found to be unfair. In the latter regard, the dispute follows up on the widely commented Dziubak ruling, decided by the Court at the end of last year.

Facts of the case

The case was brought by a number of Romanian consumers, who, despite receiving their income in Romanian leu, entered into a credit agreement for a sum denonminated in Swiss francs. As a result of the fall in value of the leu, the amount to be paid increased very significantly. The consumers argued that the bank failed to provide them with adequate information on the exchange rate risk, which they found unreasonably disadvantagous. The bank responded that the contested term reflected the principle of monetary nominalism expressed in the Romanian Civil Code and, therefore, fell outside the scope of the unfairness test in line with Article 1(2) of Directive 93/13.

Opinion of AG

Against this background, the referring court firstly asked whether a contractual term that reflects a general principle established by law (such as the principle of monetary nominalism) is subject to the provisions of Directive 93/13. According to the AG,  the exemption in Article 1(2) extends to the statutory provisions - including both mandatory and default rules - which were adopted "specifically for the type of contract concerned" or which are applicable to the contract according to a legislative reference. This conclusion was justified by a teleological argument, according to which it is only possible for the national legislature to "strike a balance" between the parties inasmuch as the specific arrangement between the parties was indeed envisaged by it (para. 42). If the provision is not intended to create a balance between consumers and sellers or suppliers, the trader should not be able to rely on Article 1(2), which is for the national court to verify. Although the interpretation does not actually lie too far off from the previous case law of the Court of Justice, such as RWE Vertrieb or Aqua Med, it could potentially further reduce the improtance of Article 1(2) exemption.

Assuming the referring court should go forward with a substantive fairness assessment, a further question was raised as regards the analysis of core terms under Article 4(2) of Directive 93/13. In this regard the AG recalled, following the Andriciuc case, that a term under which a loan denominated in a foreign currency is to be repaid in that currency may concern the 'main subject matter of the contract' within the meaning of Article 4(2) of Directive 93/13. Terms of this kind escape fairness assessment under UCTD (provided Member States have not increased the level of consumer protection, see Ahorros) in so far they are in plain intelligible language. According to the AG, the relevant criteria have already been explained by the Court. The trader is thus required to comprehensively inform the consumer about the potential risks of variations in the exchange rate and the fact that they must be borne entirely by the borrower (para. 59).

Finally and perhaps most importantly, the referring court sought to find out whether freezing the exchange rate at the rate applicable on the date of signature of the agreement offers a solution which ensures the full effectiveness of the consumer’s rights under UCTD. According to that court, the agreement could not continue to exist without the contested term, yet its annulment would not be favourable to the consumer either, as it would put the latter at the risk of having to repay the entire loan at once. To recall, full annulment was an outcome welcomed by the consumers in the Dziubak case. This, however, has not been case in Banca Transilvania. According to AG Kokott, previous case law of the Court of Justice significantly limits the scope of actions that the national court can take in situations of this kind: among others, the court may not assume that the consumer is bound by the unfair term and may not modify the contract by revising the content of the unfair term. However, in view of the AG, a national court cannot be prohibited from plugging a gap in a contract left by the removal of the unfair term with a supplementary rule that restores the balance between the reciprocal rights and obligations of the parties, simply because one of the parties is a consumer (para. 73). Such a conclusion is not to be mistaken with a judicial interpretation of the term and with reduction of its content to a permissible extent, as this would indeed reduce the directive's dissuasive effect. However, where disuassive effect is also not achieved by the anullment, national courts should be able to substitute the unfair term with a supplementary rule that replaces the formal balance between the rights and obligations of the parties with an effective balance which re-establishes equality between them (paras. 79, 87). While the possibility of, exceptionally, replacing an unfair contract term with a supplementary provision of national law if the nullity of the contract would have particularly negative consequences for the consumer has already been recognized in prior case law (Kásler, Abanca), the interpretation of the concept of 'supplementary provisions of national law' has remained underdeveloped (see Guidance Notice to the UCTD, p. 42). Reference of the AG to the rules that "replace the formal balance between the rights and obligations of the parties with an effective balance which re-establishes equality between them" could be of help in this regard. The AG herself, however, did not give her opinion whether freezing the exchange rate at the rate applicable on the date of signature could provide such a solution. The mission given to national courts, therefore, remains quite challenging.

Concluding thought

Overall, the opinion brings the discussion on the legal consequences to be drawn by national courts if a contract term is found to be unfair back on its previous track, following the more fact-specific Dziubak judgment delivered last year. It does not go against the prior case law of the Court, since one of the proposed conditions for allowing the court to replace the unfair term with a supplementary rule is the finding that annulement would have particularly unfavourable consequences for the consumer. With this condition in mind, it does not seem unlikely the interpretation laid down in the opinion will eventually be followed by the Court.

On a more general note, the commented case reminds us of the crucial role of the UCTD as a vehicle of consumer protection following the financial crisis of 2008. While the potential economic downturn caused by the COVID-19 pandemic would likely have a different nature, it is worth remembering the lessons learnt from previous times of hardship. In her opinion, AG Kokott seeks to provide for a high level of consumer protection while highlighting the importance of an "effective balance" between the rights and obligations of both parties, in line with their reasonable expectations. Lifting the economy following current crisis will be a challenging endevour and will likely require a similar balance to be struck. Yet the consumers' weaker position should not be forgotten along the way.

When CJEU case law travels from Spain to Slovenia: C-407/18 Addiko Bank

What happens when a Slovenian court asks the EU Court of Justice a question to which the answer should already clearly follow from previous case law on Directive 93/13? Then the Advocate General might not give an Opinion, but in Case C-407/18 Kuhar v Addiko Bank the Court provides a concise overview of its case law pertaining to, in particular, Spain and Poland, and explains what this means for Slovenia. Thus, the Court seems to understand what the referring court was looking for: back-up for its interpretation of Slovenian procedural law.

To readers of this blog, the case will look familiar: it reminds us of e.g. Banesto, Aziz, Profi Credit Polska and PKO Bank Polski. The CJEU also refers to Banco Popular Español, ERSTE Bank Hungary and Finanmadrid. What these cases have in common with Addiko Bank, is that they all concern the (limited) role of the court in expedited debt-collection procedures, i.e. mortgage enforcement or order-for-payment proceedings. The court only performs a formalities check and cannot assess the merits of the claim. It is the debtor who must initiate a contentious debate by challenging the claim or opposing the enforcement, and it is the (consumer-)debtor who must apply for a declaration of nullity of allegedly unfair contract terms and/or the loan agreement. The court cannot review unfair terms ex officio, and the enforcement is not automatically suspended. As the CJEU recalls, there is a real risk that consumers are unaware of their rights, especially if they do not receive legal aid and lack the financial means for legal representation. In Slovenia, an additional problem is that (consumer-)debtors must provide security for the payment of the debt when they apply for suspension of the enforcement. For a summary of the restrictive procedural conditions at issue, see para 50 of the judgment.

In paras 53-63, the CJEU elaborates why the constellation of procedural rules runs counter to the effectiveness of the Unfair Contract Terms Directive. The link with the Directive is that the mortgage loan agreement at hand appeared to contain an unfair foreign currency clause. In the enforcement proceedings, however, the emphasis was on the debtors' duty to meet their payment obligations rather than the question whether the enforcement was based on unfair terms. Whilst notaries can have a "preventive" role in respect of unfair terms in mortgage loan agreements and notarial deeds, the right of consumers to effective judicial protection must be observed by giving them the opportunity to exercise their rights under reasonable procedural conditions, in particular in respect to time-limits and costs. The mere existence of a means of recourse is not sufficient, as the Slovenian rules at issue show. If there is no ex officio control of unfair terms in the enforcement proceedings, and unfair terms control only takes place at a later stage, consumers will only be protected ex post. Financial compensation will not prevent the loss of their family home.

The Court does not only provide a synthesis of its case law on effective judicial protection in the context of the UCTD; it also discusses Slovenian procedural law in detail. Apparently, the Spanish and Polish cases (still) do not give enough guidance as to what level of procedural protection is required in light of the Directive. What happens in Spain, stays in Spain, and is not 'translated' to other jurisdictions - certainly not Slovenia, and as Padraic Kenna has pointed out, not in Ireland either. The CJEU has repeatedly urged national courts to apply their national laws in such a way as to ensure the full effect of the Directive (reiterated in paras 65-66 of the judgment), but Addiko Bank demonstrates this may not happen without CJEU back-up. The CJEU's case law must 'travel' from Spain and Poland to Slovenia first. Hopefully, the judgment will signal once again that effective judicial protection requires a genuine opportunity for consumers to exercise their rights, not a mere formality; and that the CJEU's case law on unfair terms control (ex officio) in mortgage enforcement proceedings transcends specific EU Member States.

National supreme courts and their binding (but not really) decisions - CJEU in Dunai (C-118/17)

The CJEU has published its judgment in the Dunai case (C-118/17) last Thursday, in which it continues to specify the terms of declaring unfair foreign currency-denominated loans, following on the Kásler case. We have previously commented on the complexity of the arguments raised in the opinion of AG Wahl in the Dunai case (Consumer protection and rule of law...), evaluating the compliance of Hungarian law with the Unfair Contract Terms Directive. The most interesting part of the judgment is actually the last one - on the competence of national supreme courts in setting binding guidelines for lower courts how to assess unfairness.

To briefly remind the facts of the case: Mrs Dunai concluded a credit agreement denominated in Swiss francs in 2007, even though the loan was advanced to her in Hungarian florints. Just like in the Kásler case, various exchange rates (buying and selling ones) applied to different calculations between the Swiss francs and Hungarian florints - i.e. between the conversion of the loan and its repayments. After the Kásler judgment, Hungarian legislator adopted new laws in 2014 trying to protect Hungarian credit consumers from the harsh effects of having taken out a loan denominated in Swiss francs, but it did not protect them against unfair terms placing the whole of the exchange-rate risk on the borrowers. One such clause was found in Mrs Dunai's contracts.

Terms on exchange difference

The CJEU considers Hungarian 2014 laws, which allow to replace banks' own buying and selling rates of Swiss francs to be replaced by the official exchange rates set by the National Bank of Hungary, effectively altering terms and conditions of the contract, as compliant with the purpose that the UCTD attempts to achieve. This purpose being restoring contractual balance between the parties. However, the CJEU places a condition on this assessment: to the extent that such an assessment prevents the contract terms on exchange difference from being found unfair (as they will be amended to be fair), this may not place the consumer in a worse position than if the unfairness were found. This means that the consumer has to be restored to the legal and factual situation that he would have been in the absence of that term (para. 40-43). Therefore, the national court will need to ascertain "whether the national legislation, which declared terms of that nature to be unfair, allowed the legal and factual situation in which Mrs Dunai would have been in the absence of such an unfair term to be restored, in particular by giving rise to a right to restitution of advantages wrongly obtained, to her detriment, by the seller or supplier on the basis of that unfair term" (para. 44).

Terms on exchange rate risk

Terms on exchange risk rate differ from terms on exchange difference, as the first ones fall within the concept of core contract terms, excluded from the unfairness test provided they are transparent, pursuant to Art. 4(2) UCTD (para. 48). If such terms are non-transparent and found unfair, the national court should generally declare the whole contract annulled as a result of finding a core term, without which the contract cannot survive, unfair and thus non-binding (para. 52). Here, Hungarian 2014 laws seem to be in breach of the UCTD as they imply that national courts will keep the contract valid instead (para. 53). The national court may also not substitute the core term by supplementary provisions of domestic law, as this is only possible when the cancellation of the contract would have been to the detriment of the consumer, which was not the case in Mrs. Dunai's situation (para. 54-55).

Competence of national supreme courts to adopt 'binding decisions' on how to examine unfairness

The last part of the judgment considers the scope that national supreme courts have in adopting binding decisions on how to interpret national provisions implementing EU law, so as to guarantee uniformity of this interpretation by lower courts. This is a tricky question, as issuing such binding decisions might lead to national supreme courts deciding on de facto interpretation of EU law provisions rather than just of national law, which competence belongs to the CJEU. Still, the CJEU seemingly recognises the benefit of leaving the scope for national supreme courts to adopt such binding decisions, clarifying certain criteria in which light national lower courts must examine unfairness of standard terms, to ensure consistency in the interpretation of law and legal certainty (para. 63). Why is this recognition illusory though? Because this competence left to the national supreme courts may not take away the lower court's rights to apply for a preliminary reference from the CJEU in these matters or to ensure full effectiveness of EU law and provide consumers with effective protection (para. 64). Consequently, I would not really see it as the CJEU providing the scope for national supreme courts to adopt 'binding' decisions, but rather to issue certain guidelines, which lower courts may still disagree with and not follow.

Consumer protection and rule of law - AG Wahl's opinion in Dunai (C-118/17)

Much like the Spanish Aziz saga, the CJEU's 2014 decision in Kásler keeps generating new litigation - in Hungary and in Luxembourg alike. 

In Kásler, the Court decided on the applicability of unfair terms control to certain terms in foreign currency denominated loans. These terms had the effect of maximising the lender's profit by exploiting the difference between currency selling and buying rates. The ECJ held that such terms are not exempted from control, as they do not establish the main content of the contract - represented by the notion of foreign currency-denominated loan -  but rather are ancillary to that determination. While it is a core component of these loans that, in return for lower interest rates, consumers accept to take up the risk of currency fluctuation, the bifurcation between selling and buying rates is a further sophistication which alters the original model (in favour of the lender). 

As a consequence of Kásler, the Hungarian Supreme Court (Kuria) decided that those terms were unfair. This triggered a further reaction: the Hungarian legislator issued new rules with the aim of providing "replacement" terms. Under these rules, in foreign currency denomination loans the exchange rate is set at the level determined by the Hungarian Central Bank. 

This mechanism preserves the validity of the foreign currency denomination loans by making sure that there is always a way of determining the value of the debt. The laws in question also established some limitations on the possibility for consumers to claim the relevant remedies, which were the object of a different preliminary reference (OTP Bank and OTP Factoring).

In Dunai, the Court will have to decide whether the rules are compatible with the Directive. In particular, the referring court wonders how the replacement with the Central Bank exchange rate, which leaves the risk of currency fluctuation with the consumers, fares with the test set out in Kásler. A part of that judgment, indeed, concerned the replacement of terms with default rules when the contract could otherwise not continue into existence after unfair terms control. This is how the reasoning (para 83-84) went:

 [...] if, in a situation such as that at issue in the main proceedings, it was not permissible to replace an unfair term with a supplementary provision, requiring the court to annul the contract in its entirety, the consumer might be exposed to particularly unfavourable consequences, so that the dissuasive effect resulting from the annulment of the contract could well be jeopardised.

   In general, the consequence of an annulment is that the outstanding balance of the loan becomes due forthwith, which is likely to be in excess of the consumer’s financial capacities and, as a result, tends to penalise the consumer rather than the lender who, as a consequence, might not be dissuaded from inserting such terms in its contracts.

This reasoning, and in particularly the second part thereof, raised the possibility that the consumer's interest may play a role in assessing whether replacement & preservation would have to be preferred to sheer invalidation. 

The referring court thus asked, in essence, whether a law that forces them to recognise that the unfair term had been replaced by mandatory legislation determining the applicable interest rate, making it impossible for them to instead invalidate the contract for being incapable of continuing into existence, was compatible with the Directive. It also asked two related questions which we will discuss in turn.

Last Thursday, AG Wahl published his opinion in this case (here the French version, the English text is not yet available).

On the first question, the AG gives a very puzzling reply. After explaining that the goal of the Directive's article 6 is to establish an effective balance between the parties and not to invalidate all contracts containing unfair terms (para 75), the AG considers that the possibility of maintaining the contract must be assessed objectively, without letting the consideration of the party's interest play a determinant role (76-77). 

In this context, the judge's ability to replace the unfair terms must be interpreted as only applying in exceptional circumstances.   

From the above, the AG infers that a provision of national law which, in cases of partial invalidity arising from a declaration of unfairness, aims to preserve the contract's validity without the unfair term is consistent with the directive. This because the competent judge cannot remedy the term's unfairness just because invalidating the contract would be more advantageous to the consumer. 

If the AG assumes that in some way his reasoning has demonstrated that invalidating the contract would be the same as "remedying" an unfair term, this blogger has to admit to not being able to see how.

The rest of the opinion is (yes, it's possible!) even more technical to the extent that the AG delves into the distinction between the core and ancillary elements in the contract. The argument goes as follows: the original unfair terms were non-core terms, but the term that replaces them - fixing the exchange rate - is a core term. Therefore, whereas the referring court sees the Hungarian legislation as limiting their possibility to adjudicate on unfair terms, it is the Directive itself that imposes that limitation by excluding core terms from control. 

This reasoning allows the AG to answer that, contrary to the suspicions raised by the referring court in its second question, the Hungarian legislation does not hamper the effectiveness of Directive 93/13, which itself does not aim to reach into the domain of core terms. 

The third and last question by the referring court concerned the role of certain guidelines issued by the Hungarian Supreme Court - which the referring judge, again, perceived to be unduly limiting their ability to secure consumer protection. Here the AG again takes a somewhat surprising route: over four short paragraphs (109-112), the AG suggests that since national courts are always in a position to disapply national legislation incompatible with union law and/or raise a preliminary ruling request, there is no risk that the Kuria guidelines will prevent the application, by the national courts, of relevant EU law provisions. 

The institutional background of this case deserves separate mention. While asking about Directive 93/13, the referring court relates to a much broader panorama: take in particular the second part of the third question, whereby the court asks: is it in conformity with the EU's competence to secure a high level of consumer protection as well as fundamental EU law principles of effective judicial protection and fair trial for all questions of civil law that the the "harmonisation council" of a MS highest jurisdiction can guide adjudication through [guidelines], where the appointment of judges to this council does not happen in a transparent manner, according to pre-established rules, when the procedure before said council is not public, and it is not possible to know afterwards the procedure followed, the expertise and publications used and the vote of the different council manners?

The AG is very conscious that the struggle highlighted by this question goes far beyond the - already quite relevant - question of the fate of foreign currency denominated loans affected by unfair terms. His response is to carefully try to unload all questions of this background - an exercise that works better at certain turns than at others. 

Finding out whether the Court will take the very same path or take some deviations into rule of law discussions is one more reason to await the decision with great interest.