Consumers' access to interim relief - the CJEU in Myszak (C-324/23)

In case C-324/23 (Myszak) the Court of Justice of the European Union was asked again to deal with the consequences of mortgage loan agreements indexed in Swiss francs. 

The case concerns a mortgage loan contract indexed in Swiss francs whose voidance was claimed by three consumers against the Getin Noble Bank S.A. Consumers claimed the unfairness of the contractual term in question, according to Directive 93/13/EEC. Accordingly, sought interim relief in court, in order to suspend the execution of the contract containing unfair terms.

Meanwhile, however, the Bank went through a resolution procedure. Polish law bars the possibility to ask interim measures against bank dealing with special resolution procedures, according to the law implementing Directive 2014/59/EU (the Bank Recovery and Resolution Directive). 

The Polish court asked the CJEU about the compatibility with Articles 6(1) and 7(1) of UCTD and Article 70(1) and (4) of the Bank Recovery and Resolution Directive of the national law. Pursuant to relevant Polish law it is not possible to grant a consumer’s application for an interim measure to suspend, during the course of the court proceedings, the obligation to pay the loan instalments under a loan agreement which is likely to be declared invalid, on the sole ground that it was granted by a bank declared to be under special resolution.

The CJEU affirmed that a statutory provision barring consumers to obtain interim relief during resolution procedures impairs consumers to exercise their rights, and thus goes against EU law.

The Court invoked the principle of effectiveness, claiming that impeding consumers to exercise their rights because of a bank’s resolution would impact on the effective enforcement of the UCTD. The Court of Justice has, on a number of occasions, made general statements on the need for national courts to be able to adopt interim measures for the full effectiveness of court decisions concerning rights granted by EU law (see, among others, Case C-213/89, Factortame).

Although the Bank Recovery and Resolution Directive allows Member States’ laws to specify and define the procedural means of its implementation, national laws implementing it should not impede consumer protection. Accordingly, a provision barring the enforcement of UCTD, precluding adoption of interim measures, is contrary to EU law.

The decision reinforces a well-established pattern in the Court of Justice’s rulings: when in doubt, in favour of the consumer!

Average consumers not expected to conduct legal research - CJEU in Banco Santander (C-265/22)

 Patrick Tomasso on Unsplash

On July 13th, the CJEU issued a judgment further clarifying the principle of transparency under the Unfair Contract Terms Directive in variable-rate mortgage loan contracts, in the case Banco Santander (C-265/22). In such contracts the interest rate is variable with time, here: a new rate was to be determined every year for the following 12 months.  

In the Spanish case referred to the CJEU, consumers' interest rate was calculated with reference to the Mortgage Loan Reference Indices (IRPH). Consumers claimed that they were not informed as to the full impact of having such a reference rate, with relevant information either missing from the mortgage loan agreement or not being properly communicated to them. Whilst the Unfair Commercial Practices Directive was not yet applicable at the time the mortgage loan contract was concluded (2006), the Court could not consider whether the bank engaged in a misleading commercial practice. It was, however, able to assess that the UCTD may have been infringed if the bank's practice did not allow for applying to the IRPH a negative margin, in order to align the interest rate with the market rate.

The CJEU reiterates the main points on transparency from the Andriciuc and Others judgment (see our comment): Consumers require sufficient information to take prudent and well-informed decisions; mainly average consumers need to be able to estimate the total cost of the loan (para 53). This translates into an obligation, when variable-rate mortgage loan contracts are concluded, for average consumers to understand: the specific functioning of the method used for calculating that rate (para 55). This requires consumers to have easy access to the main elements relating to the calculation of the reference index (para 56). The national court in the given case needs to check whether the information provided in the agreement (with the index being published by the Bank of Spain and having been described in Annex VIII to the agreement) was sufficient for average consumers to become aware of the method of calculation of the variable interest rate (paras 57-58). Further, the national court should consider whether the lack of information in the loan agreement on a non-binding circular issued by the Bank of Spain could have been detrimental to the average consumer's ability to estimate the total loan cost. This in light of the circular stressing its significance for credit institutions (para 59). The CJEU seems to imply in para 60 that it would go to far to expect average consumers to conduct legal research, that is to try to find other documents of the Bank of Spain that could be applicable to the variable-rate mortgage loans, which have not been referenced in the agreement.

Whilst the CJEU reiterates the finding from the order in Gómez del Moral Guasch that the lack of transparency of a term does not render it, in itself, unfair, it would weigh in on the unfairness test (para 66). Further, the national court, when estimating whether the contract term introduces significant imbalance between parties' rights and obligations, has to look at what rules would apply in the absence of the agreement and assess to what extent the contractual provisions put the consumer at a detriment (Banco Primus - see our comment). With variable-rate mortgage loans this means comparing the interest rate to the statutory interest rate and the interest rates applied on the market at the date of conclusion of the agreement at issue... for a loan of a comparable sum and term (para 65).

UPDATED:

Readers interested in finding out more about the intricacies of the financial indexes used in Spain for calculating variable-rates in mortgage loan contracts, the legal value of circulars issued by the Bank of Spain, and the possible misconstruction of Spanish law by the CJEU - please check the comment of Prof. Ernesto Suárez from ESADE and UPF Law Schools in Spain.

Upon unfairness of mortgages, banks may suffer financially - CJEU in Bank M. (C-520/21)

Last Thursday the CJEU issued a much-awaited judgment in the Polish case Bank M. (C-520/21), another case dealing with the fallout of mortgage loans concluded by consumers in a foreign currency. This time the questions asked by the national court pertained to the consequences for the parties of the court declaring the whole contract null and void. When a mortgage loan contract is invalidated, it is clear to the referring court that that parties need to reimburse the sums payment (the bank should receive the loan principal, consumers - monthly payments, fees, commissions and insurance premium). But could other sums be claimed, mainly on the basis of unjust enrichment under national law? For example, could consumers claim from banks interest on the amounts they overpaid over the years, due to changes to currency exchange rates? Could banks in turn claim from consumers interest on the sum of money they were not able to otherwise invest as they provided it as a loan principal? Polish banks have indeed threatened consumers pursuing the unfairness of mortgage loan terms by asserting claims against consumers in such cases on the basis of the non-contractual use of the capital (Banki pozywaja frankowiczow, by przerwac bieg przedawnienia). 

The court relies heavily in its opening statement on the previous judgment in the case Gutiérrez Naranjo and Others (see our comment here), recalling the importance of the restitutory effect of the declaration of unfairness: Consumers must be brought back to the position (legal and factual), they would have been in if the unfair term had not existed (paras 61, 65). The second important function of the consumer protection against unfairness is to deter sellers and service providers from imposing unfair terms on consumers. National law then, in order to be compliant with the UCTD, needs to facilitate restoration of consumers to the position they would have been in if not for unfairness, as well as needs not to undermine the deterrent effect of the UCTD (para 68).

In this light, if national laws facilitate consumers claiming additional compensation from banks than the reimbursement of the monthly sums paid etc, this should not undermine the objectives mentioned above. To the contrary, such legal options may enhance the deterrent effect of the consumer protection framework against unfairness (paras 69-71). The Court recalls the need to adhere to the principle of proportionality though, which means that national courts should assess whether consumer claims do not go beyond what is necessary to achieve the above-mentioned objectives (para 73).

The same reasoning could not be applied to assess the compliance of national laws allowing banks to claim further compensation from consumers than the reimbursement of the loan principal. Such a legal option would undermine the deterrent effect of the protective framework (para 76). It could also discourage consumers from seeking to complain against unfair terms, as it may be more economically beneficial to continue with the performance of a contract containing unfair terms (para 79). The Court is not dissuaded from concluding this by arguments raised by banks indicating the fragility of the financial market at the moment, as well as claims that consumers will be receiving their loans 'free of charge' (para 80). The Court falls back on the principle nemo auditur turpitudinem allegans (no one may rely on their own wrongdoing). As banks chose to use unfair terms in their mortgage loan contracts, they may not now complain that they will lose their profits (para 82).

This judgment follows previously issued AG Collins' opinion. It has been rejoiced in Poland, where banks started counter-suing consumers not only for the return of the loan principal but also for the compensation for its use during the loan period, before the mortgage contract is annulled. Banks generally estimated such compensation to equal at least 50% of the loan principal, which would seriously impede any consumers' winning claim as to unfair mortgage loan terms. Now, if only the Polish courts were given additional resources to actually be able to handle all these cases, so that consumers could find their redress in a timely fashion.

Don't forget about the price tag: judgment in Spanish cases on mortgage costs and legal costs

Another judgment we haven't yet reported on this blog is the CJEU's judgment in Joined Cases C-224/19 CY/Caixabank and C-259/19 LG and PK/BBVA. In short, the judgment pertains to a clause that imposes the costs of vesting and cancelling a mortgage on the (consumer-)debtor, which can be viewed as an unfair term. Moreover, the judgment pertains to the limitation period that applies to claims for reimbursement - the topic of the day, see our previous blog - and legal costs.

The cases on mortgage costs, "gastos hipotecarios", have drawn a lot of attention in Spain. The CJEU 's judgment of 16 July 2020 in Caixabank opens the door to an estimated 8 million consumers who have taken out a mortgage and can now bring a reimbursement claim against their bank. Click here for an overview of costs that may be involved, including a registration fee. From the perspective of EU consumer law, the first part of the judgment is not even that revolutionary: if the cost clause at issue is found to be unfair, the consumer is entitled to reimbursement of the costs paid on the basis of that clause. In this respect, the CJEU confirms what it held earlier in Gutiérrez Naranjo: nullity is nullity. An exception is only possible if there is a national legislative provision - i.e., not the clause itself - that serves as a basis to impose costs on the consumer. In Spain, such an exception only exists for the so-called "Impuesto de Actos Jurídicos Documentados" (IADJ, a mortgage tax).

The second part of the judgment confirms earlier case law, in particular Gómez del Moral Guasch and Kiss and CIB on core terms and transparency. Articles 4(2) and 5 of the Directive preclude national case law that deems a contractual clause to be transparent in itself, without an analysis of whether it constitutes a core term and whether it is drafted in plain and intelligible language. The CJEU adds that the mere fact that the costs involved are part of the total price of a mortgage loan does not mean that they must be considered as relating to the main subject matter of the contract. In respect of opening costs - a fixed fee for setting up the mortgage - the CJEU concludes that the clause may cause a significant imbalance to the detriment of consumers when the bank cannot prove those costs reflect actual services or expenses.

According to the Spanish Supreme Court, the bank must pay 100% of the registration fee; the notary fee and administration costs must be split 50/50 between the parties. One of the referring judges in the Court in First Instance of Palma de Mallorca doubts this, because administration and taxation costs are made in the interest of the bank and the consumer has no other choice.

Your blogger is not the only one who finds the part of the judgment on the limitation period for reimbursement claims more interesting. Such a limitation period should not make it practically impossible or excessively difficult for consumers to exercise their rights. The CJEU reiterates that if the limitation period would start at the conclusion of the contract, irrespective of consumers' knowledge or awareness of their rights, this could run counter to the principle of effectiveness and the principle of legal certainty. In national case law, a 5-year period is applied that starts running from the moment a term is found to be unfair. The first time the cost clause at issue was declared unfair by the Spanish Supreme Court was on 23 January 2019. This would mean the limitation period does not expire until 5 years later, but there is no legislative provision currently governing this.

As regards legal costs, the CJEU holds that they may be an obstacle that deters consumers from exercising their rights. Pursuant to Article 394 of the Spanish Code of Civil Procedure, no cost order is issued - and the parties bear their own costs - if the claim is only partially awarded. If the consumer's request for nullity is granted, but the cost order is made dependent on the amount to be reimbursed by the bank, this may have a deterrent effect. Therefore, the principle of effectiveness precludes the application of Article 394 along these lines. Once the clause is found to be unfair, the bank should pay the legal costs.

Can we make variable interest rates transparent? - CJEU in Gómez del Moral Guasch (C-125/18)

On 3 March 2020 (yes, we are a bit behind in our commenting on the most recent developments, sorry about that! We are making our way through the news of the past few weeks) the CJEU issued a judgment in the case Gómez del Moral Guasch (C-125/18). We have previously commented on the AG Szpunar's opinion in this Spanish case (Unfairness assessment of variable interest rates...), which brought up two main issues: 1) scope of unfairness testing for terms reflecting mandatory provisions; 2) transparency assessment. Just as a reminder the consumer's mortgage loan contract came with a variable interest rate and the claim raised a possible unfairness of a term referring to an index on the basis of which the rate would be calculated.

Ad 1)

The CJEU agreed with AG Szpunar that unless the index has been prescribed by the national legislation to mandatorily apply to consumer mortgage loan contracts irrespective of the parties' choice or in absence of their choice, a term referring to it falls within the scope of application of the UCTD (paras. 32-34). This means this term could be tested for unfairness (para. 36), as Bankia had the chance to define the interest rate in any way, as long as it was 'clear, specific and comprehensible to the borrower and was consistent with the law' (para. 35).

Ad 2)

The CJEU again stresses the need for both formal and material transparency assessment under the UCTD, observance of which should allow an average consumer to understand the specific method used for calculating the variable interest rate and evaluate potentially significant economic consequences of that term on consumer's financial obligations (para. 51). In reference to the material transparency assessment the CJEU instructs national courts to check whether the essential information relating to the calculation of the variable interest rate was easily accessible to anyone intending to take a mortgage loan, e.g. because the method used for calculating that rate has been published (para. 53). National court should further inquire whether consumers were given the data on past fluctuations of the index (para. 54).
The CJEU emphasises the importance of the principle of transparency in an earlier part of the judgment (paras. 44-46). The emphasis is placed on the weak position of consumers in a transaction, the protection of which requires traders to provide clear and intelligible information to consumers in standard contract terms, regardless of whether these terms are core contractual terms.

In the last part of the judgment (paras. 63-66) the CJEU highlights the fact that if a term, indicating an index on the basis of which the variable interest rate is calculated, is unfair and is nullified, when this would have 'particularly unfavourable' consequences for consumers, the national court may choose to replace this term with a reference to a statutory index.

Comment
This judgment is another in a series of judgments elaborating for national courts mainly how to evaluate the compliance with the principle of transparency. The continued references to the possibility of average consumers to understand complex financial contracts, as long as the data provided to them is complete enough, remain somewhat jarring in light of the behavioural evidence showing the widespread lack of financial illiteracy. It seems past time for the legislators and regulators to intervene and set more guidelines on transparent disclosures/further need for consumer advice services in this area.

Unfairness assessment of variable interest rates - AG Szpunar in Gómez del Moral Guasch (C-125/18)

Facts of the case

In 2001 M. Gómez del Moral Guasch concluded a mortgage loan contract, with a variable interest rate, with a Spanish bank in order to purchase a residential apartment. In 2017 the consumer contested the fairness of a term in that contract that determines the mechanism of calculating the variable interest rate - based on the Spanish IRPH index. The consumer claimed that it is unfair that the interest rate is not indexed pursuant to EURIBOR index, which would have been more beneficial to him and is more commonly applied to Spanish mortgage contracts (in ca 90% of all contracts - para. 30). 

The IRPH index used in this loan contract was one of six IRPH indexes that have been adopted by the Spanish government. In 2011 it has been replaced - automatically - by a new IRPH index, also determined by the Spanish government. In a judgment of 14 December 2017 the Spanish Supreme Court declared, in a similar to this case, that if the IRH index is adopted as such in loan contracts it should not be subject to the unfairness or the transparency test from the UCTD, as it reflects a mandatory statutory provision (para. 53). The Supreme Court further decided that a contractual term based on IRPH index, which was drafted similarly to the one used in the case referred to the CJEU, was transparent, both formally and materially. Formally it was transparent as it was placed in the contract in a grammatically clear way, it was comprehensible and allowed consumers to understand and accept the fact that the variable interest rate will be calculated on the basis of an index controlled by the Spanish central bank. Materially it was transparent as it allowed average consumers to calculate the costs of concluding the agreement and it could not be required from banks to propose differently indexed loan agreements and explain how various indexes have been set up (para. 54).

Opinion

Scope of application of UCTD to terms that reflect national mandatory statutory provisions

First, AG Szpunar reasonably differentiates between evaluating the unfairness of an index rate that has been set out in national statutory provisions and a contractual term that foresees the use of such an index rate in calculating the variable interest rate of a loan contract (para. 59). Then he proceeds to consider whether the exception of Art. 1(2) UCTD should be applicable in this case, i.e. whether the contractual term reflects both a mandatory and a statutory provision of national law. His analysis leads to the conclusion that the mandatory character of the provision regulating the IRPH index is missing, which leaves it possible to subject a term reflecting it to the unfairness test of the UCTD. This conclusion is based on the fact that at the moment of the conclusion of the contract Spanish banks could choose whether to apply the IRPH index or another index that would fulfill the same conditions (e.g. EURIBOR index) (para. 78, 83). Therefore, as the exception from the scope of application of the UCTD should be strictly interpreted and applied only to situations where parties' freedom of choice is taken away, it cannot be said that the use of this index had a mandatory character (para. 82). 

Side note: It is irrelevant that subsequently, in 2011 the IRPH index used in the contract has been automatically substituted by a different IRPH index (here the freedom of choice of parties was eliminated, therefore, we could determine its mandatory character), as the unfairness should be assessed considering the facts of the case at the moment of the conclusion of the contract (para. 64).

Transparency

- of core terms

Whilst implementing the UCTD the Spanish legislator chose not to apply the exception for the application of the Directive to core terms of a contract (Art. 4 UCTD). This leads to an interesting conundrum in this case. Namely, whether Spanish courts could still refuse to assess the unfairness of a transparent core contract term, which is what Art. 4(2) UCTD stipulates, despite this provision not having been implemented in the Spanish legal order.

AG Szpunar rightly observes along the lines that: you cannot have the cake and eat it too. Principles of legal certainty and transparency require full transposition of provisions of directives that will then be applied in national legal systems (para. 93). In the previous CJEU judgment (Caja de Ahorres), it was decided that the Spanish legislator could have made a legislative choice, by not implementing Art. 4 UCTD, to submit also transparent core terms to the unfairness control, as this provides more consumer protection and the UCTD is a minimum harmonisation directive (para. 89). If, however, the Spanish legislator made a transposition mistake and actually intended to subject transparent core terms to the unfairness control, then, following the CJEU's judgment, we would have expected a change of the Spanish legislation. This has not occurred. Instead, the Spanish Supreme Court took upon themselves to clarify Spanish law as indeed not submitting transparent terms to the unfairness control. Such a judicial and not legislative clarification could be, however, perceived as in breach of the above-mentioned principles of legal certainty and transparency of EU law (para. 96). Therefore, Spanish courts may subject transparent core terms to the unfairness control (para. 100).

- what does it entail?

AG Szpunar reminds the previous CJEU case law referring to the principle of transparency as being fulfilled when an average consumer not only receives information that is grammatically correct but also that allows them to determine economic consequences of concluding a particular contract (paras. 106-108). In light of a given contractual term, he considers the term to definitely be grammatically clear and comprehensible in a way that it informs consumers as to what index will be applied to their variable interest rate and how the rounding-up of the interest will occur (para. 112). Does the term, however, sufficiently inform consumers about the economic consequences of the concluded loan agreement? AG Szpunar is inclined to believe that it may have done so, provided that the method of calculating the interest rate and its elements was clearly related to the applicable index rate, which has not only been fully defined, with a reference to appropriate legal rules establishing it, but also mentioned changes in the past values of that index (para. 125).

Side note 1: Here, AG Szpunar differentiates between the previous case law on transparency, which addressed transparency of loan contracts concluded in foreign currencies, and the given case on a loan with a variable interest rate. When a loan is concluded in a foreign currency, the mechanism of calculating the exchange rate may be very complex and there are potentially serious economic consequences following from non-understanding that mechanism and the fact that there is a future, uncertain risk related to its application. These potentially serious economic consequences shape the transparency requirements (paras. 115-118). In the given case, however, such a future, uncertain risk is not present, as the economic consequences of concluding a loan contract with a variable interest rate are more foreseeable (para. 119). This leads AG Szpunar to not see as necessary that bank warns consumers about the possibility of future changes to an index rate. However, by obliging banks to provide consumers with an indication of past changes to the index values, a possibility of future fluctuation should become clear, as well. Consequently, the difference in transparency requirements seems subtle.

Side note 2: AG Szpunar did not consider it necessary that the banks provide consumers with a separate information on the mathematical formula that allows to clearly follow the method of calculation of the index rate, as this information was publicly available (paras. 122-123). If, however, the information would have been difficult to access, we could possibly expect the information obligations of the banks being extended.

When CJEU case law travels from Spain to Slovenia: C-407/18 Addiko Bank

What happens when a Slovenian court asks the EU Court of Justice a question to which the answer should already clearly follow from previous case law on Directive 93/13? Then the Advocate General might not give an Opinion, but in Case C-407/18 Kuhar v Addiko Bank the Court provides a concise overview of its case law pertaining to, in particular, Spain and Poland, and explains what this means for Slovenia. Thus, the Court seems to understand what the referring court was looking for: back-up for its interpretation of Slovenian procedural law.

To readers of this blog, the case will look familiar: it reminds us of e.g. Banesto, Aziz, Profi Credit Polska and PKO Bank Polski. The CJEU also refers to Banco Popular Español, ERSTE Bank Hungary and Finanmadrid. What these cases have in common with Addiko Bank, is that they all concern the (limited) role of the court in expedited debt-collection procedures, i.e. mortgage enforcement or order-for-payment proceedings. The court only performs a formalities check and cannot assess the merits of the claim. It is the debtor who must initiate a contentious debate by challenging the claim or opposing the enforcement, and it is the (consumer-)debtor who must apply for a declaration of nullity of allegedly unfair contract terms and/or the loan agreement. The court cannot review unfair terms ex officio, and the enforcement is not automatically suspended. As the CJEU recalls, there is a real risk that consumers are unaware of their rights, especially if they do not receive legal aid and lack the financial means for legal representation. In Slovenia, an additional problem is that (consumer-)debtors must provide security for the payment of the debt when they apply for suspension of the enforcement. For a summary of the restrictive procedural conditions at issue, see para 50 of the judgment.

In paras 53-63, the CJEU elaborates why the constellation of procedural rules runs counter to the effectiveness of the Unfair Contract Terms Directive. The link with the Directive is that the mortgage loan agreement at hand appeared to contain an unfair foreign currency clause. In the enforcement proceedings, however, the emphasis was on the debtors' duty to meet their payment obligations rather than the question whether the enforcement was based on unfair terms. Whilst notaries can have a "preventive" role in respect of unfair terms in mortgage loan agreements and notarial deeds, the right of consumers to effective judicial protection must be observed by giving them the opportunity to exercise their rights under reasonable procedural conditions, in particular in respect to time-limits and costs. The mere existence of a means of recourse is not sufficient, as the Slovenian rules at issue show. If there is no ex officio control of unfair terms in the enforcement proceedings, and unfair terms control only takes place at a later stage, consumers will only be protected ex post. Financial compensation will not prevent the loss of their family home.

The Court does not only provide a synthesis of its case law on effective judicial protection in the context of the UCTD; it also discusses Slovenian procedural law in detail. Apparently, the Spanish and Polish cases (still) do not give enough guidance as to what level of procedural protection is required in light of the Directive. What happens in Spain, stays in Spain, and is not 'translated' to other jurisdictions - certainly not Slovenia, and as Padraic Kenna has pointed out, not in Ireland either. The CJEU has repeatedly urged national courts to apply their national laws in such a way as to ensure the full effect of the Directive (reiterated in paras 65-66 of the judgment), but Addiko Bank demonstrates this may not happen without CJEU back-up. The CJEU's case law must 'travel' from Spain and Poland to Slovenia first. Hopefully, the judgment will signal once again that effective judicial protection requires a genuine opportunity for consumers to exercise their rights, not a mere formality; and that the CJEU's case law on unfair terms control (ex officio) in mortgage enforcement proceedings transcends specific EU Member States.

Isn't it ironic: AG Tanchev proposes penalty Spain for failure to transpose Mortgage Credit Directive, just as new Law has been approved

The European Commission has brought infringement proceedings against Spain for failure to transpose the Mortgage Credit Directive (2014/17/EU) in time, and asked the EU Court of Justice to impose a daily penalty payment of EUR 105 991,60. The deadline for transposition was 21 March 2016, which was extended by the Commission until 18 January 2017. The new Law on Credit Agreements for Immovable Property (Ley de contratos de crédito inmobiliario) was only approved by the Spanish Parliament on 21 February 2019. Until it enters into force, consumers in Spain are unable to rely on the rights afforded to them under the Directive.

The Spanish government does not dispute that it missed the deadline. However, it argues that the penalty is disproportionate.

First, there was an unusual situation relating to difficulties in forming a government between December 2015 and October 2016. There was a political deadlock after the inconclusive election results of December 2015, which led to new elections being held in June 2016. The second election results were also inconclusive; attempts to form a government continued until the end of October 2016. After the financial crisis, consumer protection in the mortgage credit market had become a controversial issue in Spain, as we can testify by reference to the many preliminary rulings pertaining to Spain discussed on this blog. The new Law was approved only two months before the upcoming elections in April 2019.

Secondly, the Spanish government disputes that the lack of transposition may have adverse effects for competition in the mortgage credit market, and asserts that certain national measures had already been adopted that regulate aspects covered by the Directive.

In his Opinion in C-569/17, Advocate-General Tanchev rejects these arguments. EU Member States cannot invoke provisions, practices or situations existing in their internal legal system, such as elections or an interim government, in order to justify a failure to comply with their obligations under EU law, including the time limits laid down in a directive (point 36).

Moreover, Tanchev is unconvinced that the national measures that had already been adopted meet the requirements of the Directive (point 82). The effects of the failure to transpose the Directive on public and private interests is significant in the Spanish context, in light of problems in the Spanish mortgage sector (point 86). In this respect, Tanchev refers to the numerous preliminary references to the CJEU from Spanish courts. Thus, he concludes, the impact of non-transposition is serious.

AG Tanchev rejects the Commission's view that the penalty payment should be calculated from 22 March 2016 to the date of the start of the infringement proceedings: 27 April 2017. According to Tanchev, the duration of the infringement is assessed from the expiry of the extended deadline, i.e. 18 January 2017 (point 89). This means the period between December 2015 and October 2016 should not matter in any case (point 90). Still, the duration of the infringement is about 24 months, which may be considered a significant period of time.

The penalty payment must be decided according to the degree of persuasion needed in order for the Member State to alter its conduct and bring the established infringement to an end (point 80). Therefore, Tanchev proposes that the CJEU should order Spain to pay the daily payment as proposed by the Commission, with effect from the date of delivery of the judgment. At the date of the hearing, the new Law had not been approved yet. If the CJEU follows Tanchev's Opinion, Spain will no longer need to be persuaded and thus, not have to pay the penalty as soon as it notifies the Commission. Isn't the timing a bit ironic?

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.

UCTD applicable to other than employment contracts concluded between employees and employers - CJEU in Pouvin (C-590/17)

The CJEU supported today the AG Bobek's opinion in the case Pouvin (C-590/17) that the notion of consumers and sellers from the Unfair Contract Terms Directive should be interpreted broadly. This means that also employees (and their spouses) who are acquiring a loan from their employers should be seen as consumers when these loans are meant to finance the purchase of a real estate for private purposes. Simultaneously, the employer in this situation would be seen as a seller within the meaning of the UCTD, as the loan contract would be provided within its professional activity, even if it not the employer's main professional activity.

We have previously commented on the AG Bobek's opinion in this case in detail (see AG Bobek in Pouvin C-590/17: The scope of the UCTD should be interpreted broadly), thus we send our readers to this post for the summary of the facts of the case and the main arguments raised. The CJEU repeats the argumentation that the exclusion of employment contracts from the scope of application of the UCTD is not applicable to other than employment contracts concluded between employees and their employers, as long as these contracts do not regulate the employment relationship or employment conditions (paras 31-32). What is then only important to ascertain, in order to determine whether an employee is a consumer, is the purpose for which he is purchasing goods/services (needs to be private) (paras. 23, 26). It remains irrelevant that not every consumer could have concluded this contract, as they were reserved only for employees of this particular undertaking, as long as the employees who were eligible to conclude this contract did this in their private capacity (para. 30). Further, the employer should be seen in this case as a 'seller', as even if their main professional activity lies in supplying energy rather than offering loan contracts, the latter activity is ancillary in their business dealings - allowing them to attract a skilled workforce (para. 42). Moreover, the employer has more resources and, therefore, more information than any natural person, his employee. This puts the employees at a contractual disadvantage that the application of the UCTD will remedy (para. 40).

In light of the earlier judgments in Karel de Grote case and Costea, this is by no means a surprising judgment.

Ex officio control of unfair terms presupposes an effective remedy: CJEU order in PKO Bank Polski

On 28 November 2018, the EU Court of Justice issued an order in PKO Bank Polski (C-632/17), which concerns the same issue as Profi Credit Polska (C-176/17), a case we have reported on earlier. In short, the question raised by the referring Polish court was whether the order-for-payment procedure at issue is incompatible with Article 7(1) of the Unfair Contract Terms Directive (93/13/EEC), because:

(i) the procedural rules restrict the consumer's right to lodge an objection against such an order for payment in such a way that there is a significant risk that she will not exercise that right, and

(ii) in the absence of the consumer, the court does not have the power to examine (a) the unfairness of the terms of the underlying credit agreement and (b) compliance with the requirements deriving from the Consumer Credit Directive (2008/48/EC).

Thus, there were two problems:

• The court's role is, in principle, limited to a review of formalities; it does not have available to it all the elements of fact and law arising from the credit agreement and thus, is not in the position to examine unfair terms. 
• The legal relationship resulting from the credit agreement is reviewed only if the consumer lodges an objection; the objection must meet various procedural requirements in an extremely short period (two weeks); and the consumer-defendant must pay a court fee that is three times greater than the claimant; see also our blog on Profi Credit Polska. 

In Profi Credit Polska, the CJEU already held that the Member States' obligation "to lay down procedural rules that ensure observance of the rights which individuals [i.e. consumers] derive from Directive 93/13", which "implies a requirement that there be a right to an effective remedy", also enshrined in Article 47 of the EU Charter of Fundamental Rights. The two above-mentioned problems combined prevented the court from carrying out the required assessment under the EU consumer protection legislation at issue. This is reiterated in PKO Bank Polski. The CJEU concludes that the Polish order-for-payment procedure is precluded by Article 7(1) of Directive 93/13 and Article 10 of Directive 2008/48/EC.

We can tentatively draw two conclusions from the CJEU's decisions:

1. While the CJEU (still) does not make a clear distinction between Article 7(1) of Directive 93/13 (which requires "adequate and effective means" against unfair terms) and Article 47 of the Charter, it appears that the first presupposes the latter. If a case is not brought before the court, it cannot perform unfair terms control (either ex officio or at the consumer's request). In case of an "inversion of the dispute", i.e. it is the defendant – here: the consumer-debtor – who must initiate adversarial proceedings by lodging an objection, the court must determine whether the procedural rules infringe the consumer's right to an effective remedy (or rights of the defence, for that matter) as guaranteed by Article 47 of the Charter. If the obstacles are too high, there is a significant risk that consumers will not lodge and objection. 
2. The CJEU seems to suggest that the national court must be able to perform ex officio control, whether the consumer involved invokes the existence of unfair terms or not. This is in line with its earlier case law, see e.g. Banesto and Radlinger. But how does the referring Polish court obtain the necessary information? One possible answer is that the creditor must submit the underlying credit agreement in evidence. This calls into question the entire order-for-payment procedure, which is based on only a banking ledger excerpt. Is such an excerpt sufficient? And what should happen in the absence of the consumer? Should she be required to lodge an objection at all? The CJEU does not answer these questions. 

In its case law on other types of debt collection proceedings, the CJEU did not consider an "inversion of the dispute" to be contrary to EU (consumer) law in itself, as long as there were judicial remedies available to consumer. We have brought this up in previous blog posts.

However, PKO Bank Polski shows why a reliance on the consumer's initiative might be problematic, exactly because of the procedural obstacles discussed in light of Article 47 Charter. Removing those obstacles is a first step. Preventing creditors from circumventing judicial control – by allowing them to resort to extrajudicial enforcement procedures or to withhold information from the court – would be the next.

National courts are not obliged to review unfair practices during mortgage enforcement proceedings - CJEU in Bankia

On 19th September 2018, the ECJ issued its ruling on the Bankia case (Case C‑109/17). The case concerned the application of the Unfair Commercial Practices Directive in mortgage enforcement proceedings and gave the Court the opportunity to comment on the different mechanisms used by the Unfair Commercial Practices Directive and the Unfair Contract Terms Directive (hereafter UCPD and UCTD respectively).

This blog has previously covered also the AG opinion on this case. You can find the previous post here.

Facts of the case

In 2006 Mr Marí Merino, Mr Gavilán and Ms Marí Merino took out a loan with Bankia secured by a mortgage in respect of a capital of EUR 166 000, repayable over a 25-year period. That agreement set the amount of the ‘starting price’ of the mortgaged property at EUR 195 900.

In 2013,  after a second novation, the amount of the starting price of the property was reduced to EUR 57 689 and the period for repayment of the outstanding loan capital of EUR 102 750 was extended to 40 years. In addition, the extrajudicial sale of the property was authorised and the agreement now states that that property is the habitual residence of Mr Marí Merino, Mr Gavilán and Ms Marí Merino.

Bankia used that novated loan agreement secured by a mortgage to initiate mortgage enforcement proceedings. Mr Marí Merino, Mr Gavilán and Ms Marí Merino lodged an objection to those proceedings claiming that the agreement contained unfair terms. First, the amount of the starting price was reduced to their detriment, with the extension of the period for repayment being merely a means of inducing the borrowers to accept the novation of the agreement. 

Furthermore, they argued that Bankia acted in a way that was contrary to the requirements of professional diligence inasmuch as it took advantage of restructuring the debt in order to alter the valuation of the property in question, meaning that Bankia employed an unfair practice.

Finally, Bankia was not adhering to the Code of Good Banking Practice, by which it is bound, by not allowing the borrowers to discharge the debt by giving the property in payment while remaining there as tenants, even though they satisfied the conditions set in the Code for doing so. 

Questions referred

The following questions were referred to the ECJ:

1)    Must Directive 2005/29 be interpreted as meaning that national legislation such as that currently regulating Spanish mortgage enforcement — Article 695 et seq. in conjunction with Article 552(1) of the [Law of Civil Procedure] — which does not provide for the review by the courts, of their own motion or at the request of one of the parties, of unfair commercial practices, is contrary to Article 11 of that directive because that national legislation hinders or prevents review by the courts of contracts or acts which may contain unfair commercial practices?

(     2)    Must Directive 2005/29 be interpreted as meaning that national legislation such as the Spanish law which does not ensure actual compliance with the code of conduct if the party seeking enforcement of a debt decides not to apply that code (Articles 5 and 6 of Royal Decree-Law No 6 of 9 March 2012, read in conjunction with Article 15 thereof) is contrary to Article 11 of that directive?

(     3)    Must Article 11 of Directive 2005/29 be interpreted as precluding Spanish national legislation which does not allow a consumer, during mortgage enforcement proceedings, to request compliance with a code of conduct, in particular as regards the giving of a property in payment and extinguishment of the debt — Point 3 of the Annex to Royal Decree-Law No 6 of 9 March 2012, Code of Good [Banking] Practice?’

Review of unfair practices in mortgage enforcement proceedings

The first question is asking whether national law which prohibits the review of unfair commercial practices is contrary to art. 11 UCPD. The Court pointed out that the UCPD prohibits unfair practices, but leaves it to the discretion of the Member States to decide what measures to use to combat unfair practices. Such national measures need to be adequate and effective and that the penalties thus laid down are effective, proportionate and dissuasive (para 31). Furthermore, the Court underlines that the UCPD is without prejudice to national contract law and individual legal action, as set out in art. 3(2) UCPD.

Therefore, the ECJ found that it is not necessary for national courts during mortgage enforcement proceedings to be able to review whether the enforceable instrument breaches the UCPD, as the UCPD does not place such an obligation on the Member States (para 34).

The Court elaborates on the differences between the well-known Aziz case, also concerning mortgage enforcement proceedings in Spain and the present one, as well as the differences between UCTD and UCPD. It states that both the UCTD and the UCPD aim to ensure a high level of protection; however, each one pursues that objective using different means (para 36).

The reasoning put forward by the Court is that the UCTD clearly sets out in art.6 UCTD that unfair terms are not to be binding on the consumer, while the UCPD merely prohibits unfair practices (paras 37, 41). The UCTD seeks to address the inequality of power between the parties which is created by the unfair term, while the UCPD only seeks to put an end to unfair practices, without an impact on the validity of the contract. 

Contrary to Aziz, where compensatory protection was found to not meet the requirements of art. 7(1) UCTD, in the case of unfair practices, compensatory protection can be sufficient (paras 45-46). Still, the Court clarifies that it is possible for the unfairness of practices to be considered during mortgage enforcement proceedings in the context of review of unfair terms. As established in Pereničová and Perenic the finding of an unfair practice doesn't have a direct effect on the validity of the contract (paras 49-50).

For the first question, the court agrees with the AG opinion that the answer to the first question should be negative.

Codes of Conduct

The second and third questions referred to codes of conduct, and whether national law which does not confer a legally binding nature to a code of conduct is contrary to art. 10 UCPD. The Court notes that it is not up to them to establish whether the Code in question falls under the definition of code in art. 2(f) UCPD.

The court stated that even though non compliance with a code may constitute an unfair practice, the UCPD does not require for the Member States to provide for direct consequences when the traders do not adhere to the code they subscribed to (para 58). This decision undermines the effect of codes of conduct, if traders face no consequences when they do not adhere to them. More precisely, it transfers that responsibility to the Member States, even though the UCPD is a maximum harmonisation directive and intended to strengthen the relevance of codes of conduct.

This judgement appears to weaken the importance of the UCPD, making it clear that it is less able to protect individual consumers than the Unfair Contract Terms Directive. While the judgement is firmly based in the letter of the law, it shows the resulting gaps in protection and the need for individual remedies for the UCPD, in order to achieve the proposed aim of a high level of consumer protection.