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.

No, Escobedo Cortés does not imply that double interest rates must be secured for traders (but nice try, Prima banka Slovensko)

Earlier this week the Court of Justice delivered a brief, yet noteworthy judgment in case C-192/20 Prima banka Slovensko. The case seems fairly stratightforward and the Court, in fact, proceeded to the judgment without a written opinion from the Advocate General. The judgment, nonetheless, provides a useful clarification of where Directive 93/13/EEC on unfair terms in consumer contracts (UCTD) and the associated CJEU case law do not reach. 

Facts of the case

The case involed a Slovak consumer, who concluded a loan agreement with a local bank for the amount of EUR 5 700 at an interest rate of 7.90%. Several months from the conclusion of the contract, the consumer began to default on his/her payments. After appox. 4 months of non-payment, the bank declared the early termination of the term of the loan and demanded the immediate repayment of outstanding ammount along with a default interest as well as an ordinary interest. 

The court hearing the case in first instance upheld the bank's action in part. Specifically, the court considered the claim for default interest to be valid, but dismissed the claim for ordinary interest, on the ground that Slovak law did not allow such accumulation. Indeed, national law appears to have posed certain limits on what creditors can claim in the event of consumer's default and the claims put forward by the bank arguably exceeded those limits. 

Here is where the case get interesting. In the appeal, the bank decided to invoke the previous judgment of the CJEU in joined cases C-96/16 and C-94/97 Banco Santander and Escobedo Cortés (see our earlier comment here). Specifically, the bank argued that the judgment required national legislation to ensure that a borrower who has failed to fulfil his/her contractual obligations should pay not only default interest but also ordinary interest.

Judgment of the Court

The grounds of the judgment essentialy consist of two parts. First, the Court considered the main legal questions in the case at hand. For the Court, these were actually linked not to the provisions of Articles 6(1) and 7(1) of the UCTD, referenced by the national court, but rather to the Directive's scope. Second,  doubts about the consequences of Escobedo Cortés were addressed.

In respect of the Directive's scope, the Court referred to Article 1(2) of the UCTD, which provides that contract terms which reflect mandatory statutory or regulatory provisions shall not be subject to the provisions of the Directive. This may not be immediately inntuitive, since controversy in the case at hand was rather that the terms did not reflect national provisions. The well-established reasoning of the Court in respect of Article 1(2), however, turned out to be useful to make a more general point: that it is not the goal of the UCTD to analyse the content of national mandatory statutory or regulatory provisions, which parties can incorportate into their contracts. It is presumed that national legislature has struck a balance between all of the rights and obligations of the parties to certain contracts, and the UCTD does not intend to interfere with that balance (para. 32). This has to be distinguished from the national provisions relating to the control of unfair terms, whose compliance with the UCTD can be investigated. In the case at hand, however, the contested provisions did not appear to relate to the review of unfair terms and were therefore excluded from the scope of the UCTD (para. 35). Therefore, the Court did not even have to recall that the UCTD is a minimum harmonisation directive.

While this would have sufficed to provide the refering court with useful guidance (that the UCTD was not applicable to the national provisions in question), the Court went on to dispell some doubts related to its previous judgment in Escobedo Cortés. The Court reiterated the context of that case: that it involved an assessment whether national case law that did not prevent the accumulation of interest rates complied with the UCTD. The Court considered that it did; however, it did not follow from that judgment that an accumulation of interests rates must always be ensured under national law (para. 41). It would indeed be rather odd if a directive that seeks to eliminate unfair terms from consumer contracts were to produce such a result.

No judicial fine-tuning of the scope of UCTD: CJEU departs from AG's opinion in Banca Transilvania

Earlier this year we reported on the interpretation of Directive 93/13/EEC on unfair contract terms (UCTD) proposed by the Advocate General Kokott in case C-81/19 Banca Transilvania. The questions referred in the case concerned, firstly, the exclusion from the scope of the UCTD of terms reflecting mandatory statutory provisions in Article 1(2) and, secondly, the conditional exclusion of core terms in Article 4(2) from the scope of fairness assessment. In both respects the Advocate-General proposed a pro-consumer reading, widening the scope of relevant assessment and elaborating on the competences of national courts to fill gaps in the contract. In the judgment issued last week, however, the Court of Justice  departed from the AG's opinion and limited its reply to the first question only.

Facts of the case

The case was brought by two Romanian consumers, who entered into a credit refinancing agreement, converting the original loan in Romanian leu into an agreement denominated in Swiss francs. Due to subsequent fluctuations in the CHF/RON exchange rate, the amount which they ultimately had to pay increased considerably. The claimants argued that the bank failed to provide them with adequate information on the exchange rate risk, which they found unreasonably disadvantageous. 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 the UCTD. Against this background, the referring court asked the CJEU whether a contractual term which reflects a supplementary rule of national law articulating a general principle (such as the principle of monetary nominalism) is subject to the provisions of the UCTD. In case of an affirmative answer, a further question was raised as regards the analysis of core terms under Article 4(2) of Directive 93/13 and the associated legal consequences to be drawn by national courts.

Exclusion of contract terms reflecting mandatory statutory or regulatory provisions

Pursuant to Article 1(2),  contractual terms which reflect mandatory statutory or regulatory provisions are not subject to the UCTD while recital 13 explicitly clarifies that this also extends to the rules "which, according to the law, shall apply between the contracting parties provided that no other arrangements have been established". One could assume that this definite formulation leaves no doubt about the scope of the exclusion. However, the provision has been interpreted differently by the Romanian courts, leading the referring court to wonder how far it indeed applies to supplementary provisions. 

For the Advocate General Kokott the reference constituted an opportunity to clarify the scope of the exclusion, paving the way to its judicial fine-tuning in a pro-consumer manner. The AG admitted that the exclusion in Article 1(2) covered contractual terms reflecting both mandatory and supplementary (default) rules, but proposed a qualification at a later stage. Specifically, according to the AG, the exclusion only applied to the provisions which were adopted specifically for the type of contract concerned or were applicable to the contract according to a legislative reference. This conclusion was justified by a teleological argument, following which it was 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. Consequently, following the opinion, if the provision was not intended to create a balance between consumers and sellers or suppliers, the trader should not be able to rely on Article 1(2). Having reached this conclusion, the AG moved to the analysis of the remaining questions.

The Court of Justice, however, did not see eye-to-eye with the reading of Article 1(2) proposed by the AG. Even though it stressed that the exclusion was to be interpreted strictly (para. 24), it did not agree with the consequences drawn by the AG from the previous case law explaining the rationale of analysed provision. In this regard, the Court reiterated that the exclusion "is justified by the fact that, in principle, it may legitimately be supposed that the national legislature struck a balance between all the rights and obligations of the parties to certain contracts" (para. 26). Accordingly, it stressed, the fact that such a balance has been struck does not constitute a condition for the application of the exclusion in Article 1(2) of Directive 93/13, but the justification for such an exclusion (para. 27). Consequently, to establish whether the conditions for applying the exclusion are met, the national court has to determine whether the contractual term in question reflects mandatory provisions of national law that apply between contracting parties independently of their choice or provisions that are supplementary in nature and therefore apply by default. The Court did not elaborate on what it means to 'reflect' the relevant rules, as it previously did in Aqua Med (see our comment here). Rather, it merely referred to the findings of the national court, according to which the contested term did indeed reflect the provision of national law and confirmed that the supplementary nature of that provision was irrelevant for the application of Article 1(2).

Concluding thought

While the judgment of the Court may be seen as conducive to greater legal certainty it does not necessarily contribute to an increased consumer protection. The pro-consumer reading proposed by the AG was not entirely unfounded and seemed well-aligned with the rationale of the provision as well as the requirement to interpret the exceptions strictly and ensure a high level of consumer protection. While in the case at hand, the Court was not ready to expand the scope of fairness assessment under UCTD, the case is not entirely lost for the consumers. Firstly, national courts should continue to assess whether the analysed contract term indeed "reflects" the relevant national provision. Secondly, due to the minimum level of harmonisation introduced by the UCTD, Member States may decide to extend the scope of the fairness assessment, for example in the direction proposed by AG Kokott.

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!