Thursday, 16 October 2014

Spanish mortgages continued - AG Wahl's Opinion in cases Unicaja Banco and Caixabank

Today, Advocate-General Wahl delivered his Opinion in a number of joined cases regarding the assessment of standard terms in mortgage contracts under Spanish law. The cases of Unicaja Banco and Caixabank address the question whether the Spanish procedural rules governing the enforcement of a mortgage satisfy the requirement of Directive 93/13 (Unfair Terms in Consumer Contracts) according to which Member States must ensure that consumers are not bound by unfair clauses.

A brief recapitulation of earlier case law may be helpful to understand the currently pending disputes, which all relate to the consequences of the European economic crisis for the Spanish housing market: In the CJEU's judgment in Aziz (see a previous post), the court established that Spanish procedural law did not comply with the Unfair Terms Directive, insofar as it did not provide a court assessing the unfairness of standard terms in a mortgage contract to offer interim relief, in particular the possibility to stay mortgage execution proceedings, as a result of which a home owner could already have been evicted from the property before a judgment on the fairness of the bank's standard terms had been given. Spanish law was amended so as to repair these and other flaws in the legal framework for mortgage enforcement (in Law no 1/2013). In the case of Sánchez Morcillo, the CJEU recently established that Spanish procedural law was still not up to standard, as the assessment of the unfairness of the relevant terms was left to the discretion of the judge and, moreover, consumers were not given equal procedural defences as banks (see a summary in a previous post).

Unicaja Banco and Caixabank now focuses on another provision resulting from the law reform, which 'imposes a ceiling on the default interest recoverable through the enforcement of a mortgage: the rate of default interest must not be more than three times the statutory interest rate. If that ceiling is exceeded, the courts are to give creditors the possibility of adjusting the default interest rate so that it falls within the statutory limit.' (para. 3, 12-13 of the AG's Opinion) In the contracts at issue default interest rates range from 18% to 22.5%. The referring courts in essence asked whether they, in case they found these clauses to be unfair in light of Directive 93/13, should declare the clauses to be void and not binding or rather moderate the interest clauses. Furthermore, the national judges questioned the compatibility of the reform law with the EU Directive.

AG Wahl is, first of all, of the opinion that Article 6 of the Directive 'requires national courts to exclude the application of an unfair contractual term so that it does not produce binding effects with regard to the consumer, but does not authorise them to revise the content of that term. The consumer contract must continue to exist, in principle, without any amendment other than that resulting from the deletion of the unfair terms, in so far as such continuity of the contract is possible under national law.' This is in line with the CJEU's judgment in Case C-618/10 Camino, in which the Court held that national judges in principle should not replace unfair terms by ones that do comply with the Directive: 'The contract containing the term must continue in existence, in principle, without any amendment other than that resulting from the deletion of the unfair terms, in so far as, in accordance with the rules of domestic law, such continuity of the contract is legally possible.' The CJEU's more recent judgment in Case C-26/13 Kasler seems to be the odd one out, to the extent that in this case the contracts at issue could not remain in existence without the clause at issue and, given the negative consequences this would have on consumers, the national court was allowed to replace the unfair term by a supplementary provision of national law. 

AG Wahl distinguishes Unicaja Banco and Caixabank from Kasler, considering that '[i]t is unclear how invalidation of an unfair default-interest clause, such as the clause at issue, would be detrimental to a borrowing consumer' (para. 30). Whether that observation holds true does not seem self-evident, as the further existence of the mortgage contract might be at stake in case the bank will not receive any interest anymore, which may be considered to be a quite essential part of the mortgage agreement.

In the second place, the AG is of the opinion that: 'A provision of national law, such as the Second Transitional Provision of Law No 1/2013 of 14 May 2013 laying down measures for the strengthening of the protection of mortgagors, the restructuring of debt and social rent (Ley 1/2013 de medidas para reforzar la protección a los deudores hipotecarios, reestructuración de deuda y alquiler social), under which a creditor seeking enforcement, on the basis of a mortgage agreement containing a clause setting default interest at a rate higher than three times the statutory interest rate, may adjust the amount of default interest recoverable through the enforcement of a mortgage so that it does not exceed that threshold, is compatible with Directive 93/13 and, in particular, with Article 6(1) thereof, in so far as the application of such a provision is without prejudice to the obligation of national courts under that directive to exclude the application of an unfair contractual term in consumer contracts so that it does not produce binding effects with regard to the consumer, but without revising its content. It is for the referring court to determine whether that is the case, taking the whole body of national law into consideration and applying the interpretative methods recognised by that law.' In other words, the Spanish reform law is compatible with EU law, insofar as it does not interfere with the national courts' duty to hold unfair terms to be not binding on the consumer, without revising the terms' content (again cf. Camino).

The AG reaches this conclusion by observing that the Spanish provision on default interest applies to all standard terms alike, regardless of whether they fall within the material scope of the Directive (and can, thus, be assessed on their unfairness) and whether the mortgage contract is a consumer contract in the sense of the Directive or not (para. 36-37). As a consequence, in regard to standard terms that can be regarded as unfair under the Directive, consumers are protected by EU law, which entails non-bindingness of unfair terms. As concerns terms that either fall outside of the scope of the Directive or are not considered to be unfair, the national law protects debtors (incl. consumer-debtors) by providing a ceiling on default interests rates. While one may follow the AG's line of reasoning on this point, some more thought may be given to its implications: first of all, to what extent are parties able to assess beforehand under which of the two regimes their contract clause falls (which depends on the judge's assessment of its unfairness); in the second place, could this construction give an incentive to judges to rather assess a term to be fair in order to be able to amend it, instead of establishing its non-bindingness under the Directive?

To be continued.

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