Thursday, 8 November 2012

On proportionality - AG Kokott's opinion in Case C-415/11 Aziz v Catalunyacaixa

Today, Advocate General Kokott delivered her opinion in the case Aziz v Catalunyacaixa, which is currently pending before the Court of Justice of the European Union. This latest addition to the line of Spanish cases concerning the application of Directive 93/13 on Unfair Terms in Consumer Contracts (incl. Océano, Mostaza Claro, Asturcom and Calderón Camino) involved the assessment of a standard term in a loan agreement in the context of mortgage foreclosure proceedings. The referring judge in particular asked for clarification of the concept of '(dis)proportionality' in the context of ex officio judicial evaluation of the unfairness of certain standard clauses in consumer credit contracts.

The facts of the case were the following: In order to finance the purchase of a family home, Mr Aziz had concluded a loan agreement with the Catalunyacaixa bank, security for which was provided by a mortgage on the house. When Aziz got into financial problems and failed to pay the monthly instalments of the loan on a regular basis, the bank made use of its contractual option to terminate the contract earlier (a so-called 'acceleration clause') and claim back the total amount of the loan. Furthermore, the bank started mortgage foreclosure proceedings regarding Aziz's property. In these proceedings, under Spanish law there are only limited grounds for objection against the foreclosure, none of which was applicable in this case. Moreover, Aziz did not appear in these proceedings nor manage to prevent the public sale of the house by paying the remaining amount of the loan plus interest and costs. Following a public sale that attracted no bidders, the bank obtained property of the house for 50% of its contractually established value. Consequently, Aziz lost ownership of the house and was left with a remaining debt to the bank amounting to 40,000 euro. In order to put the bank in possession of the house, finally, Aziz was evicted from the property.

In the proceedings that gave rise to the preliminary question to the CJEU, Aziz requested the Juzgado de lo Mercantil n° 3 of Barcelona to declare the nullity of the standard contract term regarding judicial foreclosure, thus effectively annulling the outcome of the procedure. The referring judge raised the following preliminary questions:

'Whether the system of levying execution, in reliance on judicial documents, on mortgaged or pledged property provided for in Article 695 et seq of the Ley de Enjuiciamiento Civil (Code of Civil Procedure), with its limitations regarding the grounds of objection available under Spanish procedural law, may be nothing more than a clear limitation of consumer protection since it involves, both formally and substantively, a clear impediment to the consumer's exercise of rights of action or judicial remedies of such a kind as to guarantee the effective protection of his rights.

This reference to the Court of Justice of the European Union is made so that the concept of disproportion can be expanded upon with regard to:

(a) the use of acceleration clauses in contracts planned to last for a considerable time - in this case 33 years - for events of default occurring within a very limited specific period;

(b) the setting of default interest rates - in this case exceeding 18% - which are not consistent with the criteria for determining default interest in other consumer contracts (consumer credit), which, in other types of consumer contracts, might be regarded as unfair, and which, nevertheless, in contracts relating to immovable property, are not subject to any clear legal limit, even where they are applied not only to the instalments that have already fallen due but also to the totality of those that have become due as a result of acceleration;

(c) the unilateral establishment by the lender of mechanisms for the calculation and determination of variable interest - both ordinary and default interest - which are linked to the possibility of mortgage enforcement and do not allow a debtor who is subject to enforcement to object to the quantification of the debt in the enforcement proceedings themselves but require him to resort to declaratory proceedings in which a final decision will not be given before enforcement has been completed or, at least, the debtor will have lost the property mortgaged or charged by way of guarantee - a matter of great importance when the loan is sought for the purchase of a dwelling and enforcement gives rise to eviction from the property.'

In reply to the first question, Advocate General Kokott considers that a mortgage foreclosure system that limits the possibilities to object against the execution is incompatible with the Unfair Terms Directive if it impedes the consumer from obtaining effective judicial protection in the foreclosure proceedings as well as in separate proceedings aimed at enforcing the consumer's rights under the Directive (para. 58). Effective judicial protection could, for instance, take the form of the possibility for the judge to suspend foreclosure proceedings while the assessment of an unfair term is pending (para. 57).

In reply to the second question, subdivided in three questions regarding specific contract terms, the Advocate General holds that:

(a) it is for the national judge to assess the unfair nature of the acceleration clause, evaluating whether (and if so, to what extent) the clause deviates from the applicable law, whether there is an objective reason for including the clause and whether the shifting of the contractual balance does not deprive the consumer of effective protection (paras. 68-80);

(b) as regards a clause on a default interest rate, the national judge has to assess, in particular, to what extent the interest rate deviates from the otherwise applicable legal interest rate and whether it is proportionate with an eye on the aim pursued through the clause (paras. 81-88); and

(c) concerning a clause on the unilateral determination of the amount of variable interest, the national judge needs to pay special attention to the clause's consequences within the national system of procedural law (paras. 89-96).

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