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!

 

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 C‑738/19: limits to global assessment of term's fairness

Today 10 September, the Court of Justice decided a case concerning circumstances with a certain notoriety in the country it originates from - The Netherlands. The question stems from the complicated encounter between Airbnb and other forms of tourist rentals and regulated tenancy contracts: in other words, how vigorously can landlords of regulated rentals seek to use contract terms to prevent exploitation of low-price accommodation by the tenants?

The contract at stake in the main dispute contained a 5000 euro penalty in case the tenant did not use the apartment as main residence or sub-let it without the owner's approval. This is a common clause in Dutch "social" tenancy contracts. Remedies for the landlord under Dutch law, however, also include the possibility to claim disgorgement of any profit made by breaching an obligation - as a way of simplifying proof of damage for the claimant. 

This means that, in the case which made its way to the CJEU, a tenant found in breach of the contract's terms was first evicted and then asked to both pay the 5000 euro penalty and transfer to the former landlord any profit made from sub-letting the apartment. 

The referring court asked the CJEU whether, in assessing the penalty clause at stake under the unfair terms directive, account should be taken of other penalty clauses included in the contract, even though they were not cumulatively applicable to the breach under discussion. What seems clear, however, is that it was the combination between the penalty and Dutch law allowing for disgorgement of profit to keep the referring judges on the hedge. 

Contrary to what the Court seems to have assumed when opting to go forward without AG opinion, the question is not moot. It implies both answering a specific question raised by the Directive's annex: when is a penalty clause excessive? And more in general reflecting on what the Directive's Article 4 means by stating that all other terms in the contract must be taken into account when deciding whether a term (penalty clause or other) is unfair.  Can this be meant to include also the broad context of rules applicable to the contract?

The Court recalled, as to the first question, a number of previous decisions essentially trying to articulate when terms - and, especially - the consequences they dictate can be considered justified in relation to the breach they react to. 

It is the referring court's task, the CJEU observed, to establish whether a certain penalty clause is unfair - without adding much content, the CJEU seems sympathetic to the Dutch court's claim that a social housing contract justifies a high penalty fee for illicit sub-letting. 

Furthermore, the Court concludes that neither other penalty clauses in the contract must be considered - other terms count when there's a concrete chance of them exerting a cumulative effect - nor the possibility to demand disgorgement of profit next to the penalty. The latter not being a term, the CJEU places it beyond the scope of Directive 93/13. 

This argument, in particular, seems questionable: of course the Dutch tort law rules must be beyond the scope of the unfair terms control, but the Court has several times reaffirmed that the background rules applicable to the contract matter in assessing unfairness: they cannot be unfair on their own, but why would they not contribute to assessing the term's likely impact?

Besides, the Dutch rule seems to already go a long way to fulfil the main purposes of penalty clauses - discouragement of breach and facilitation of recovery for the claimant -, so would that not count in assessing both the need for and proportionality of the penalty? 

As difficult as it may be to have much sympathy for fraudulent tenants, the reasoning in this case does not really sit well with my understanding of penalty clauses - and unfair terms. Looking forward to hearing if someone has different thoughts!

Case C‑511/17 Unicredit Bank Hungary: Ex officio unfairness assessment limited to subject matter and to existing legal and factual elements

In  the case C-511/17, the CJEU followed the AG’s opinion closely (about which we wrote here). The case deals with the scope of the obligation to assess the unfairness of contractual terms ex officio, under Directive 93/13/EEC (Unfair Terms Directive).

The CJEU clarified that the Unfair Terms Directive does not oblige national courts to conduct any unfairness assessment beyond the subject matter of the dispute (paragraph 28). In other words, as AG Tanchev also defended, the CJEU highlighted the importance of protecting the ne ultra petita principle. However, the CJEU considered that it is within the subject matter of the dispute that national courts examine ex officio the unfairness of contractual terms in order to guarantee a high consumer protection, particularly to prevent the consumer’s claim from being rejected when it could have been upheld had the consumer invoked the unfair nature of that particular term (paragraph 32).

In addition, the CJEU established that national courts are only obliged to carry out an ex officio assessment of unfairness regarding those contractual terms whose unfairness can be determined by existing elements of law and fact available to the court (Profi Credit Polska case). However, in order to implement the duty of ex officio examination, national courts should not be confined exclusively to the elements of law and fact provided by the parties (paragraph 36). This means that national courts can, of their own motion, take investigative measures in order to complete the case file. However, national courts should only do this if the existing elements of law and fact ‘give rise to serious doubts as to the unfair nature of certain clauses which were not invoked by the consumer but which are related to the subject matter of the dispute’ (paragraph 37).

Finally, the CJEU reiterated that in order to assess the unfairness of a contractual term (on which the claim is based) the national court must take into account all the other terms of the contract (Banif Plus Bank, C‑472/11). This obligation is justified by the fact that the assessment of one or more specific terms must be contextualized, and the ‘cumulative effect of all the terms of that contract’ must be taken into account (paragraph 47). This does not mean, however, that there is an obligation for the national court to ex officio assess the unfairness of all individual clauses in the contract – it is rather a duty to contextualize the assessment of unfairness. The CJEU also calls for a non-formalistic consumer protection, that is, an interpretation of the claim that is based on the comprehension of its content and of the laws it invokes (paragraph 33).

Therefore, the CJEU concluded that Article 6(1) of the Unfair Terms Directive does not require national courts to examine every individual contractual term ex officio. Instead, the Unfair Terms Directive must be interpreted as imposing an obligation to examine only the contractual terms which are connected to the subject matter of the dispute, as long as the national courts have the legal and factual elements required for that assessment (which can be supplemented by measures of inquiry). The CJEU also determined that, while Articles 4(1), 6(1) and 7(1) impose a duty to take all contractual terms into account, there is no duty for the national court to individually assess the unfairness of each term.

In this specific case, the CJEU determined that the terms that the consumer did not challenge but whose unfairness assessment is required of the referring court are not connected to the subject matter of the dispute in the main proceedings. Therefore, the national court does not have a duty to ex officio assess the unfairness of those terms (paragraph 39).

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. 

AG opinion in VKI v TVP Treuhand (C 272/18) - a test case for the Amazon judgment

Last week, a seemingly very technical opinion has been delivered in a case concerning the transparency of a choice-of-law clause included in a fiduciary contract to be concluded by non-professional investors with an investment firm, Verein für Konsumenteninformation (VKI) vs

TVP Treuhand- und Verwaltungsgesellschaft für Publikumsfonds mbH & Co. KG (C-272/18) The case was triggered by an action brought about by VKI, seeking to obtain an injunction prohibiting the defendant to use the choice-of-law clause in the contracts it concludes with non-professional investors.

From the point of view of consumer protection, the case poses two main questions: 

1. Does the Rome I Regulation, including its rules concerning consumer contracts, apply to contracts of the type at stake?
2. If it does, is the choice-of-law clause unfair for failing to comply with transparency requirements and hence misleading the consumers as to their legal position?

As to the first question, the AG concludes that neither of the exclusionary rules possibly relevant to the case leads to attracting the case outside the sphere of application of the Regulation. More in detail, the case does not concern the functioning of a legal person (excluded under art 1.2.e); it also does not concern contractual obligations related to the provision of services exclusively in a country different than the consumer's country of residence. The latter exclusion (art 5.4.b), the AG claims, must be interpreted strictly and autonomously - ie not on the basis of a possibly relevant national rule. Given that some of the services rendered under the contract were to be performed in the consumer's country of residence, this exclusion does not apply according to the AG. 

If the Regulation applies, then the choice of law clause is only of limited impact - according to article 6.2. of the Rome Regulation, choice of law in consumer contracts cannot deprive consumers of the protection offered by mandatory rules of law in the country where the consumer has their habitual residence. In so far as a choice of law clause purports to determine exclusively which rules apply to the contract, the Court has declared in its Amazon decision, such clause is misleading and unfair under Directive 93/13 (UCTD). According to AG Øe, the Court's previous finding is applicable to this case and, hence, the clause is unfair. 

The Amazon case, one should say, was welcomed by consumer advocates but is also object of criticism - inter alia, by Øe's colleague Hogan -, thus it will be interesting to see how the Court will respond to this question as it may indicate whether it intends to stand by its previous findings or reconsider/restrict them. 

Commission guidance note on Unfair Terms Directive

The European Commission adopted today a guidance note on unfair contract terms. It is intended to ensure that consumer associations and legal practitioners, including judges, will be better equipped to protect EU consumers from unfair contract terms. The guidance note is based on the case law of the EU Court of Justice on Directive 93/13. As a complement to the guidance note, European businesses organisations have drawn up recommendations on how mandatory consumer information as well as terms and conditions can be presented to consumers in a more user-friendly and transparent way.
Both initiatives follow up on the REFIT Fitness Check of EU consumer and marketing law, as announced in the Commission’s Communication on a New Deal for Consumers.

Source: https://www.pubaffairsbruxelles.eu/fighting-unfair-contract-terms-commission-issues-guidance-to-better-protect-consumers-eu-commission-press/ 

Confusing Grand Chamber judgment on 'accelerated repayment clauses' in mortgage loan contracts (C-70/17 and C-179/17)

Yesterday the Grand Chamber of the EU Court of Justice gave judgment in two Spanish cases on so-called 'accelerated repayment clauses' (vencimiento anticipado): Joined Cases C-70/17 and C-179/17, Abanca v García Salamanca Santos and Bankia v Lau Mendoza. We have discussed Advocate-General Szpunar's extensive Opinion in these cases in an earlier blog post.

Summary of the preliminary references

In short, both cases pertain to the consequences of a finding of unfairness of a clause allowing for the early termination of a mortgage loan contract - also referred to as an 'acceleration clause' or 'early maturity clause'. Spanish procedural law provides that on the basis of such a clause, the bank can call in the entire loan and initiate enforcement proceedings against the debtor. After Aziz, the minimum time period for access to mortgage enforcement proceedings was changed to 3 months instead of 1 month. Early termination is still allowed, if agreed by the parties. Thus, it is not a default provision.

The question the Spanish Supreme Court put before the CJEU in Abanca was whether the national court could consider only the 1-month period as unfair, so the rest of the 'early maturity clause' would remain valid. In that event, the bank could still claim the full amount in the enforcement proceedings, as long as it respected the statutory 3-month period.

In Bankia, a Court in First Instance in Barcelona questioned the case-law of the Supreme Court that allowed continuation of the enforcement proceedings, because this was arguably more favourable to consumers. According to the Barcelona Court, the enforcement proceedings should be terminated after the clause was found to be unfair. The bank could only claim termination of the contract in ordinary court proceedings, which would possibly result in a favourable outcome for consumers.

Thus, the preliminary reference in Bankia challenged the Supreme Court's approach. The Spanish Government even contested the admissibility, on the ground that the Supreme Court had already made a preliminary reference on this issue.

Summary of AG Szpunar's Opinion

AG Szpunar's clear and elaborate analysis of the issue led to his conclusion that it is not possible for the national court to "replace" the 1-month period in the 'early maturity clause' with the statutory 3-month period. Once the clause is found to be unfair, it must be struck out in its entirety. This would mean there is no longer a basis for enforcement of the full amount and therefore, the bank no longer has access to mortgage enforcement proceedings. However, the decision should ultimately be left to the consumer, who can then decide if she wants to avail herself of the protection offered to her.

As we have noted in our blog post, AG Szpunar rightly observed that when the 'early maturity clause' is struck out, this does not extinguish the creditor's rights. The loan agreement is still valid. The creditor can still claim unpaid instalments due and/or seek termination of the agreement in ordinary court proceedings.

The CJEU's judgment: rejection of the Spanish Supreme Court's approach?

Yesterday's preliminary ruling is a Grand Chamber judgment, yet it is much less clear than the AG's Opinion. On the one hand, the CJEU holds that the mere removal of the 1-month period from 'early maturity clauses' is "tantamount to revising the content of those terms by altering their substance", which undermines the dissuasive effect (para 55).

On the other hand, the CJEU expressly leaves the door open for substitution with the statutory 3-month period, if the consumer would otherwise be exposed to unfavourable consequences (para 61). What makes this part of the judgment confusing, is not only that it is doubtful whether the use of an ordinary procedure rather than the special mortgage enforcement procedure does entail "a deterioration of the procedural position of the consumer" (para 62).

[NB: In this respect, it is confusing that the CJEU refers to "the ordinary enforcement procedure", where a declaratory action is meant (cf. para 35).]

Source: bufeterosales.es

Also and more strikingly, the judgment seems to be based on the erroneous presumption that removal of the 'early maturity clause' could potentially mean that the continued existence of the mortgage loan contract is no longer possible (para 60). It seems obvious that the invalidity of the clause at stake does not require the national court to annul the contract in its entirety. Whilst the CJEU reinforces its case law on the modification, revision or replacement of unfair contract terms, in particular Kásler (paras 53-60), it is not relevant for the present cases. The exception of Kásler does not apply here, as - again - AG Szpunar already observed.

The only way forward for the national court is to exclude the application of the terms at stake (cf. para 63). The CJEU's judgment suggests that in that event, the supplementary application of the 3-month period is not possible, and the Spanish Supreme Court's approach must be rejected. We hope this will be clarified in another case on this issue that is still pending: C-486/16.
The 'early maturity clause' must be removed in its entirety, unless the consumer objects. The role of the consumer, who must be consulted in the matter, is indeed an important point. The consumer must be heard in case of non-application of unfair terms, as well as - presumably - in case of substitution of unfair terms, although the CJEU does not say this explicitly. As noted in our previous blog post, the consumer can be informed by the court about the advantages and disadvantages of the mortgage enforcement procedure vs. the ordinary procedure. She can then consent to maintaining the 'early maturity clause', although this seems to be an unlikely scenario.

Forward to the past: AG Hogan in Lovasné Tóth

Last Thursday, AG Hogan delivered his opinion in case C-34/18, Lovasné Tóth v Erste Bank Hungary Zrt. It does happen, every now and then, that one reads an AG opinion so remarkable that it is difficult to decide what to comment with. In this case, let me begin this post by expressing the wish that this opinion be quickly discarded and possibly forgotten. Nothing had let me prefigure, on a quiet March morning, that I would be witnessing a single-handed attempt, by a recently appointed AG, to undo much of the CJEU's adjudication on unfair contract terms over the past ten years. Yet, this seems to be pretty much what AG Hogan set out to do in his Lovasne Toth opinion. Let us see how. 

1) Good faith

The court has, indeed without much support in the original intentions of the drafters, developed a test that distinguishes the "significant imbalance" and "good faith" prongs within the Directive's Article 3 - by trying to also increasingly specify the contents of both prongs. AG Hogan, however, does not agree with considering good faith as a separate requirement. And perhaps rightly so, especially if one understands good faith as the AG does - as some form of lack of malice rather than the duty to take the other party's interest into account. When the AG says that "significant imbalance" to the detriment of the consumer is the sole requirement, with no need to establish "that the clause was inserted as a result of the absence of good faith", he takes us back 20 years to the discussions in national laws surrounding the introduction of the directive. Is this necessary?

The feeling of being transported back to a couple of decades ago, however, runs highest in the following parts of the opinion, which delve on...

2) Transparency, back to contra proferentem

According to AG Hogan, the appropriate place for transparency is Article 5 of the directive, setting out an interpretation rule according to which unclear terms must be interpreted to the consumer's advantage. Remember VKI, where the ECJ said that lack of transparency was also capable of resulting in unfairness when it led to the consumer being misled as to their rights? 

According to the AG, VKI "has perhaps somewhat overstated the scope of the transparency requirement" and "the court should revert to its previous approach" (para 89). 

With an interesting formalistic turn, the AG explains that, since the Directive's Article 3 talks about "rights and duties arising from the contract", only "the legal effect produced by a term" matters to unfairness (para 85). 

3) Transparency continued, hollowing out substantive transparency

While the AG only expressly asks the CJEU to reconsider its judgement in VKI, the Opinion can be seen as implicitly taking a stance against a much larger bunch of CJEU transparency cases. This is particularly obvious where the AG turns its criticism to a specific passage in VKI, according to which

"where the effects of a term are specified by mandatory statutory provisions, it is essential that the seller or supplier informs the consumer of those provisions" (VKI, para 69)

The requirement, if generalised, seems indeed to raise considerable - and likely undesirable - practical consequences: should all terms be specified by explaining their legal implications by reference to the background legal rules? The AG is not entirely wrong by claiming that, if taken literally, the requirement may well amount to consumers being faced with "a seminar in basic contract law given by unqualified personnel" (para 99).

Interpreting the requirement cum grano salis seems, hence, a worthy enterprise. Removing it altogether, on the other hand, sounds like a call for the restauration of an order in which the Directive essentially lays inapplicable. This sound resonates louder due to the AG's insistence on separating information duties from transparency, and thus drawing a rigid separation between, in his own analysis, the Unfair Commercial Practices Directive (see for instance para 90 and 109) and unfair terms assessment.

Given the CJEU's insistence on substantive transparency in a long line of cases starting with RWE and, so far, culminating in Andriciuc (through Kasler and others), the AG's emphasis on the fact that the unfairness assessment should concentrate on "the wording" (para 93) of a contentious clause is way more than a rebuke of VKI. It rather promises to undermine much of the most significant developments in European consumer law adjudication in the past several years. The fact that the AG, in passing (at para 92), acknowledges that terms "should clearly articulate the legal effects" [my emphasis] arising from their insertion does not provide any meaningful reassurance in light of the wholesale down-grading of transparency that the opinion as a whole pursues.

This is obvious if one considers what a clear articulation of the legal effects of a term requires: where, like in the case at stake in Lovasne, a certain term may look like it prevents the consumer from objecting to enforcement, while this is not the case, explaining the legal consequences of the terms under mandatory law merely requires adding a line stating: please note that this does not affect your otherwise existing rights to object to the contract's enforcement. Yet, the obligation to include such language, or to provide a similar reassurance in person, is precisely what the AG seeks to exclude from the scope of the Directive - thus de facto hollowing out any meaning transparency could have besides some mild cautioning against purposefully confusing language (lest it be, let's not forget, at most interpreted against the drafter).

To conclude, I would like to wish AG Hogan a great time at the Court of Justice - but also to express my hope that he drops the project of taking EU consumer law forward to the past with a resolution that sounds more ideological than the institutional position of the AG would recommend.

Second-guess or second instance: Opinion of AG Szpunar in five cases on the EU Court of Justice and differences of interpretation between lower, higher and highest national (civil) courts

"La protection du consommateur est ainsi devenue un des chapitres essentiels du droit de l’Union qui, avec une double dimension – tant économique que sociale –, touche à la vie quotidienne des consommateurs de l’Union." 

~ Advocate General Szpunar, Opinion in Cases C-70/17 and C-179/17 (point 53)

Introduction

Consumer protection has become "an essential chapter of EU law", as Advocate General Szpunar rightly observes in one of his Opinions that were published this week. It is a focal point in the interplay between different actors at different levels in EU law. In 3 Opinions, AG Szpunar discusses 5 separate cases that touch on the relation between the national (civil) courts of the EU Member States and the EU Court of Justice in respect of the interpretation and application of national (procedural) law in the light of the Unfair Contract Terms Directive. It appears that the CJEU provides an avenue for lower courts to 'second-guess' the approach of courts that are higher in hierarchy, to the extent that they challenge the instructions of their own appellate court or the case law of the Supreme Court. Through preliminary references, the CJEU may be called upon to settle differences between courts of different instances. This raises questions as to the division of competences between the EU and the Member States, as well as the link between the substantive and procedural protection of EU citizens in their role as consumers. In the absence of harmonised procedural rules, who is the ultimate interpretor of national provisions governing civil proceedings (involving consumers)? Is there any room for a balancing of interests, other than the 'overriding objective' of the protection of consumers against unfair terms? And who decides what's in the consumers' best interest? 

Five cases, three Opinions

The 3 Opinions this blog post is concerned with pertain to the following 5 cases:

• C-70/17 (Abanca v. García Salamanca Santos) and C-179/17 (Bankia v. Lau Mendoza), hereinafter referred to as the Abanca-case; click here
• C-486/16 (Bankia v. Sánchez Martínez); click here
• C-92/16 (Bankia v. Rengifo Jiménez) and C-167/16 (BBVA v. Quintano Ujeta); click here

Especially the Opinion in the Abanca-case is worth reading. AG Szpunar analyzes the background of consumer protection against unfair terms elaborately, and summarises the development of the CJEU's case law in this area. He also tries to distinguish the legal issues from socio-economical considerations, and to clarify the role of national (civil) courts from an EU law perspective. In this blog post, we will focus on two aspects:

1. the power of national courts to substitute a national legislative provision for an unfair term, or rather: the lack of such a power (cf. Joined Cases C-96/16 and C-94/17, discussed here), and
2. the possibility of lower courts to 'circumvent' guidance given by a higher court by making a preliminary reference to the CJEU.

Both aspects illustrate the tension between the requirements flowing from EU (consumer) law and a more traditional view on private law and civil procedure as a matter of national law. On the one hand, AG Szpunar's answers to the questions posed by the referring courts could be seen as a logical continuation of the CJEU's case law. On the other hand, those answers could be seen as limiting the room for discretion of national (civil) courts even further. However, AG Szpunar carefully considers the different interests involved, and explains that while he understands the concerns, his proposed solution is in line with previous judgments.

First, we will examine the type of contractual terms at issue in these cases. It is not so much about the assessment of the (un)fairness of those terms as such, as it is about the consequences of a finding of unfairness. Secondly, we will take a closer look at the procedural implications. At the end of this blog post, we will get back to the position of lower courts vis-à-vis higher courts.

Accelerated repayment and mortgage enforcement: differences of interpretation between Spanish courts

The 5 above-mentioned cases are all requests for preliminary rulings from Spanish civil courts: in the Abanca-case, the Spanish Supreme Court (Tribunal Supremo) itself, in the other cases courts in first instance (Juzgados de Primera Instancia). All 5 cases relate to so-called 'early maturity' or acceleration clauses in mortgage loan agreements, i.e. terms containing an advanced expiration date (vencimiento anticipado): when the debtor fails to meet his payment obligations, the creditor can claim repayment of the totality of the loan after the expiration of a stipulated time period and initiate mortgage enforcement proceedings. The CJEU's judgment in Aziz gave rise to a debate in Spain as to, among other things, when the debtor's non-compliance was "sufficiently serious" - in the light of the duration and amount of the loan - to justify the creditor's exercise of the right to invoke accelerated repayment (cf. Banco Primus). Since 2013, Article 693.2 of the Spanish Code of Civil Procedure (Ley de Enjuiciamiento Civil; hereinafter LEC) sets the minimum time period that the parties may agree on at 3 months. However, many contracts predating that provision allowed the creditor to invoke the clause after only 1 month. In this respect, it is relevant to know that in Spain, the creditor needs leave from the court to enforce his security rights. Therefore, the question arose how the court should deal with unfair acceleration clauses. Should the mortgage enforcement proceedings - which were based on the clause - be terminated even when the creditor has waited 3 months or longer?

The Tribunal Supremo. (source: informativojuridico.com)

According to the Tribunal Supremo, the answer to this question was negative. As long as the right to invoke accelerated repayment was exercised fairly, the creditor would still have access to mortgage enforcement. The unfair clause would effectively be replaced by Article 693.2 LEC. One of the reasons given by the Tribunal Supremo was that the mortgage enforcement procedure is also more beneficial for consumers. The parties would not have to resort to ordinary proceedings. Thus, consumers would avoid the risk of having to pay high legal costs and default interest.

Some lower courts disagreed with this interpretation, and openly questioned it before the CJEU. They found that an unfair acceleration clause could not be replaced by reference to Article 693.2 LEC. Where the clause was the basis of the mortgage enforcement, the proceedings should be declared inadmissible or suspended; whether the clause had been invoked after 1, 3 or 38 months did not matter. Moreover, the creditor’s chances of success in ordinary proceedings were regarded to be low; this cast doubt on the Tribunal Supremo’s reasoning as to which procedure was actually more beneficial for consumers. Lastly, the referring court in Case C-92/16 wondered whether giving consumer-debtors procedural advantages in one procedure, as opposed to another, was compatible with the EU Charter of Fundamental Rights if it was up to the creditor, not the consumer, to choose between procedural mechanisms and thus, to decide whether or not the consumer could enjoy those advantages.

AG Szpunar: no ‘reparatory revision’ of unfair terms

AG Szpunar disagrees with the Tribunal Supremo's interpretation as well, and refers to Banesto and in this regard. The Unfair Contract Terms Directive imposes a result obligation on the Member States and their national courts to ensure that unfair terms are not binding on consumers. As we have seen in e.g. Gutiérrez Naranjo, this obligation is far-reaching. The Directive does not have 'direct horizontal effect', i.e. it cannot be relied on directly by private parties in 'horizontal' disputes. Yet, "not binding" really means "not binding", and the deterrent or dissuasive effect of the Directive requires that an unfair term cannot be revised or replaced by the court (only in exceptional circumstances, see e.g. Kásler). The acceleration clause must be struck out from the loan agreement, regardless of when it has been invoked by the creditor. The loan agreement will continue to exist without the clause. 'Reparatory revision' is not possible; the clause cannot be substituted with Article 693.2 LEC. That provision cannot be qualified as 'supplementary law', although this is ultimately for the national court to decide. 

A reference to the so-called 'blue pencil test' of the German Bundesgerichtshof does not help either, because the acceleration clause cannot be split up: it would lose its meaning if the unfair parts were to be crossed out. Without the stipulation of a specific time-period, the clause would practically be deprived of its purpose. 

Procedural implications

If AG Szpunar's conclusion is followed, creditors would be sanctioned for including unfair acceleration clauses in their standard terms and conditions by denying them access to the mortgage enforcement procedure. Once the acceleration clause is struck out, there is no longer a basis for enforcement of the entire loan. This would allegedly negate the creditor's security rights, which are crucial for the financial market. Another argument used by the Tribunal Supremo was that this would have economic repercussions. It should nevertheless be noted that the existence of an acceleration clause in the mortgage loan agreement is not a necessary precondition for enforcement (cf. Articles 578 and 693.1 LEC). Without the acceleration clause, the creditor would not be able to claim repayment of the entire loan at once, but he could still claim unpaid instalments due.

Advocate General Szpunar.
(source: curia.europa.eu)

This raises the question whether it is justified that, as soon as the creditor relies on an unfair acceleration clause, he should be denied access to mortgage enforcement. AG Szpunar acknowledges that this constitutes a limitation of the creditor's rights, but not an extinction, if only because the loan agreement remains valid for the rest. From the Directive's point of view, the legal issue is whether the acceleration clause is unfair and should therefore be declared null and void, rather than whether the creditor would have provided the loan without the clause. According to AG Szpunar, it is not relevant whether the mortgage enforcement procedure is more beneficial to consumers. Yet, he illustrates with clear examples that is doubtful if this is indeed the case. The decision should ultimately be left to the consumer herself, who can be informed by the court about (procedural) advantages and disadvantages and then decide if she wants to avail herself of the protection offered to her; see e.g. Banif Plus Bank.

In Cases C-92-/16 and C-167/16, AG Szpunar observes that there is not enough information available to conclude that the Spanish mortgage enforcement procedure in general is incompatible with the Charter or the principle of effectiveness. If it is true that this procedure awards certain procedural advantages, it may be contrary to the principle of effectiveness. The specific characteristics of court proceedings, which are governed by national (procedural) law, cannot constitute a factor that is liable to affect the legal protection of consumers under the Directive.

Lower courts as EU-judges

In Case C-486/16, the creditor - Bankia - had initiated mortgage enforcement proceedings on the basis of an acceleration clause. The court found the clause to be unfair, and refused to grant leave for the enforcement. Pursuant to Article 552.3 LEC, the creditor then has recourse to ordinary proceedings. Instead, Bankia waited more than two years to try again, arguing that this time the non-compliance was sufficiently serious. We understand this second attempt was based on Article 693.2 LEC (not 693.1).
The court in first instance held that the decision in the earlier proceedings had the status of (formal) res judicata; it was final in the sense that it could no longer be appealed. This entailed that Bankia should be denied a second opportunity. The Court of Appeal, however, allowed the enforcement. The case was referred to the court in first instance, which subsequently made a preliminary reference to the CJEU. In line with his Opinion in the Abanca-case, AG Szpunar considers the Court of Appeal's approach to be contrary to EU (consumer) law. He points out that EU law gives lower courts the possibility to make a request for a preliminary ruling (Article 267 TFEU); they are EU-judges as well. National legislation or case law cannot stand in the way of this possibility.

From the perspective of (national) civil procedure, it is quite revolutionary for lower courts to go against the instructions of their own appellate court in the same case. These instructions are, in principle, binding upon the parties and the lower court. It may be seen as problematic if lower courts start to second-guess their appellate courts and/or come to view the CJEU as a second instance, insofar as this undermines legal certainty. Of course, this is not to say that lower courts cannot or should not make preliminary references. It is just to show that the objectives of EU law and national law are not always aligned.

Lower courts and the highest (civil) court of a Member State are both entitled to ask questions to the CJEU. That the Tribunal Supremo was first in the Abanca-case, could not stop the Juzgado de Primera Instancia de Barcelona from making a preliminary reference as well. For the Tribunal Supremo this is a sensitive issue, as it appears to be a direct confrontation by the court in Barcelona. In addition, AG Szpunar's Opinion suggests that the Tribunal Supremo has overstepped its power to give guidance to lower courts as to how to apply national (procedural) law in unfair terms cases. The summary of the Opinion in this blog post does not do justice to its thoroughness, which demonstrates that AG Szpunar is aware of the context in which the CJEU must answer the questions put before it.