A consumer's preference for invalidity? AG Pitruzzella on the consequences of unfairness under the UCTD

Last week, AG Pitruzzella submitted an interesting Opinion on unfair terms in case C-260/198 (Dziubak) (the English version of this opinion is not yet available).

This case concerns a foreign currency-indexed loan undertaken by Polish consumers. The consumers claimed that the term establishing the conversion rate was unfair because it essentially allowed the bank to unilaterally determine the conversion rate. The competent Polish court agreed with the claim, raising the problem of what should happen to the contract given that the conversion mechanism determined the main interest rate. Should it be declared invalid?

There are two layers to this question, as correctly observed by the AG: first of all, it is to be ascertained whether the contract really cannot be upheld without the unfair term or a replacement thereof. Whether this was the case in Dziubak is something the referring court, the AG thinks, needs to ascertain in light of its national law. According to Pitruzzella, the Directive requires that this assessment be carried out objectively, ie without reference to the parties' will or preference, but also in light of the applicable national law. In this case, it would depend on Polish law whether the fact that the contract's "type" would change - from a foreign currency-indexed loan to a loan in Polish currency subject to a pretty low - would lead to invalidity of the agreement without the original clause.

Invalidity was the solution preferred by the consumers, while the bank claimed that, rather than invalidating the contract in its entirety, the court should set an exchange rate in accordance with general principles contained in the Polish Civil code, such as preserving the parties' intentions and customs.

In previous case-law, the AG says, the CJEU has repeatedly asserted that in principle unfair terms are never to be replaced, but exceptions can be made when the contract as a whole could become invalid as a result of removing the unfair term and the consumer would be worse off if the contract falls (see para 34 opinion).

The referring court had a number of questions as to the application of these principles to the case at stake: concerning the objective possibility of continuing the contract, is this to be assessed with reference to the moment of adjudicating, or to the moment of concluding the contract? And did the fact that the consumer in this case preferred invalidity over preservation make the "Kásler exception" inapplicable?

To the first question, the AG answers that the assessment must take place with reference to the moment of adjudication. This is, according to the opinion, in line with the Directive's aim to re-establish an effective balance between the parties and in line with the Kàsler requirements.

As concerns the relevance of the consumer's preference for invalidity, according to the AG this is enough to make the Kàsler rule inapplicable - as an exception, the requirements on which it is based must be applied strictly (para 66) and one of them failing no exception to the general rule can be made.

As to the feasibility of the solution preferred by the bank - integrating the contract by means of general rules - the AG takes an interesting approach in his reasoning: he says that the Kásler rule presupposes replacement of the unfair term with terms which enjoy a presumption of fairness under the directive's article 1, ie the somewhat obscure class of "statutory mandatory provisions" that, case-law adds, "apply to the contract when nothing else has been agreed between the parties". From a contract lawyer's perspective, this is essentially a non-sense combination - conflating mandatory and supplementary  (or "default") provisions. However, it is interesting that the AG elaborates on the Leitbild function: replacement, in his view, is only possible when the resulting rules express the legislator's view of what a fair balance of the parties' interests in a specific contract would be. The general principles possibly relevant to this case, however, do not satisfy this requirement. As a consequence, a judge's intervention in the contract according to these principles would represent an excessive interference with contractual autonomy. Such intervention would, furthermore, again go beyond the strict limits set in Kásler, which did not intend to allow for any sort of judicial discretion. (79)

The referring court finally also wants to know whether maintaining the unfair terms in place is an option when this is "objectively" to the consumer's advantage. The CJEU has stated in Pannon that such upholding of the clause is an option when the consumer chooses not to avail themselves of the invalidity - replacing the adjudicating court's assessment for this expression of the consumer's will is, according to the AG, not an option. This is arguably the lease surprising part of the opinion.

Whether the Court will follow the conclusions, and the reasoning therein, is not obvious. As usual, we will keep you posted!  

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.