Double jeopardy in Volkswagen cases - CJEU in Volkswagen Group Italia and Volkswagen Aktiengesellschaft (C-27/22)

Last Thursday the CJEU adjudicated in the Volkswagen Group Italia and Volkswagen Aktiengesellschaft case (C-27/22 - see here). We have previously written about the Volkswagen scandal on the blog (see here) - that is, on the unfair commercial practice that Volkswagen engaged in by installing a defeat device in its cars, which led to marketing them as more environmentally-friendly in 2009. As our past blog posts mention, various national authorities were active in their investigation of Volkswagen's conduct. And here lies the problem that the CJEU tackled in this new case: Could different national procedures against Volkswagen (for the breach of consumer protection rules, esp. prohibition of unfair commercial practices) breach the principle of ne bis in idem? 

Eliott Van Buggenhout on Unsplash

Two national authorities' decisions were at stake here. The Italian authority (AGCM) imposed a fine of 5 million Euro on Volkswagen in August 2016 for the unfair marketing practices in Italy. This decision was promptly challenged in court by Volkswagen. Then, the German authority (Public Prosecutor's Office of Braunschweig) imposed a fine of 1 billion Euro for the 'negligent breach of the duty of supervision' in developing and installing relevant software worldwide. Volkswagen did not challenge this decision and paid the fine, which means it became final in June 2018. Part of the German decision indicated that the amount of 5 million Euro from the total fine would indeed penalise for the conduct mentioned in the Italian decision, whilst the rest of the fine aimed at taking away the economic advantage that Volkswagen derived from engaging in the unfair practice (para 19). This then led to Volkswagen claiming that the Italian authority's decision infringes the principle of ne bis in idem (embedded in Article 50 of the Charter of Fundamental Rights), as it would duplicate the penalty for the same acts against the same person when it became final. To be able to claim this, Volkswagen argued that administrative fines placed on it were of a criminal nature. 

The Court of Justice agreed that administrative fines for breach of unfair commercial practices may be of a criminal nature. What is necessary is that the penalty has a punitive aim and a high degree of severity (determined on the basis of its amount compared to maximum allowed penalty under relevant provisions) (paras 45, 53-54). If these criteria are fulfilled, the penalty should be seen as of a criminal nature, even if national law classifies it as an administrative penalty (para 48). The Court mentions that if the fine was merely trying to repair the damage (possibly take away the unfair advantage), then it would be unlikely that it had a punitive or deterrent character, which characterises criminal sanctions (para 49). However, e.g. the fact that there is a maximum amount that can be set as a fine suggests that it would not always allow for taking away the achieved unfair advantage (para 52).

Consequently, if the Italian and German procedures penalise Volkswagen on the basis of identical material facts, not just similar facts and regardless of the national legal qualification of these facts, Italian law would not be able to allow for maintaining of the proceedings (paras 66-67, 70). This would indeed infringe the principle of ne bis in idem. This would only be different if the following three conditions were satisfied (para 96): 1) duplication of proceedings would not excessively burden Volkswagen (interestingly, since the Italian fine amounts to only 0.5% of the German fine, CJEU would not consider awarding it alongside the German fine as an excessive burden - para 97); 2) there needs to be transparency and predictability of which acts or omissions could be subject to duplication of proceedings (could Volkswagen predict then that their practices could give rise to proceedings in various countries? - para 98); 3) proceedings should be duplicated within a proximate timeframe and coordinated (and it seems that the Italian authority did not engage in any attempts initiated by the German authority to coordinate these proceedings - paras 101-102).

Sanctions for breaching national rules on consumer credit: the CJEU in C-303/20

Earlier this month the CJEU delivered another judgment on the interpretation of Directive 2008/48/EC on Consumer Credit Agreements. In C-303/20 Ultimo Portfolio Investment SA v KM the CJEU was asked to interpret Art. 23 of the Directive, according to which, penalties for breach of national rules on consumer credit must be effective, proportionate, and dissuasive.

The facts

The consumer, KM concluded a consumer credit agreement with Aasa Polska, from which agreement the debt was assigned to the claimant, Ultimo Portfolio Investment. Although the monthly installments for this loan were only around 88 EUR (408 PLN), it transpired that at the time when the contract was concluded, the consumer was heavily indebted, having 23 loans, and her husband independently extra 24 active loans! These together totaled approximately 98 840 EUR (457 830 PLN) amounting to a monthly figure of approx. 2 153 EUR (2300 PLN). At the time, KN was employed with a net salary of approx. 500 EUR (2300 PLN) and her husband was out of work, with no disposable income.

Unsurprisingly, the consumer was unable to honour her payment obligations, and following the default, the claimant brought an action in front of the competent Polish court. The defendant consumer however alleged that before the loan was approved, the lender did not ask any questions to enquire about her financial situation: her outstanding debts, her disposable income, or the debts of her household. Since the claimant was unable to provide proof to the contrary, the court tackled the issue of sanctions, questioning whether the Polish rules correctly implemented Art. 23 of the Directive. In particular, the referring court specified that the Polish Code of Minor Offences only imposes a fine for breaching responsible lending obligations, and this fine is time-barred and only affects the natural persons within the credit institutions such as the director of the company or the credit intermediary.  

The legal question

The referring court effectively asked whether Art. 23 of the Directive must be interpreted to mean that in determining the effectiveness, proportionality, and dissuasiveness of the penalties courts could only take into account provision(s) of the national law specially adopted to implement Art. 23 of the Directive?

The ruling

The CJEU ruled that in interpreting Art. 23 of the Directive, national courts must take into account not only the special national provisions that are adopted to transpose the Directive but also the other provisions of the relevant law that should be interpreted in the light of the working and objectives of the Directive.

In its reasoning to CJEU acknowledged that the low amount of the penalty or that facts that it only applies to natural persons may be indicative of its shortcomings. Referring to its earlier case law it reiterated, penalities to be effective and dissuasive they must deprive the economic benefit of the infringement and must have a positive effect on the consumer in question.

However, the CJEU reminded that under Art. 288 TEFU, directives are legal instruments that are result-oriented, while binding on the result to be achieved they leave discretion to the Member States in the form and method of implementation. Consequently, transposition does not necessarily require legislative action. The existence of general principles and general rules may render a legislative action superfluous. It follows, that in order to determine whether a national law adequately implemented the obligations resulting from the given directive, it is important to take into account not only the legislation specifically adopted for the purposes of transposing the directive but also 'all the available and applicable legal rules.' National courts must therefore consider the whole body of rules of national law and interpret them in the light of the wording and purpose of the Directive in order to achieve the outcome that is consistent with the objectives pursued by the Directive.

In the present case, the court highlighted that Polish law benefits from a range of civil penalties in addition to those in the Code of Minor Offences. Importantly, the CJEU also highlighted that the case at hand would benefit from the penalty applicable for using unfair terms. Namely, Directive 1993/13/EC on unfair contract terms was implemented in Polish law to render excessive charges not binding on consumers (see our report on Profi Credit Polska).

Our evaluation

This judgment provided an important contribution to our understanding of European consumer credit law. It suggests a holistic or we could call a 'contextual approach' to interpreting the fairly vague and general provision on penalties in Art. 23 of the Directive, giving it a more concrete content in a national context. The important message is that in determining whether the sanction meets the requirements of the Directive, national courts must take into account all available sanctions under the applicable national rules, and the CJEU seems to suggest that if more than one sanction is applicable, national courts should weigh them up according to the criteria provided in Art. 23. The judgment also gives useful hints on how to interpret what is effective and dissuasive in the case at hand, and it could be read in connection with other judgments that tackled the aspect of proportionality of sanctions (see our report on Home Credit Slovakia).

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!

Ex-officio powers of national courts in enforcing Directive 2008/48/EC: the CJEU in C-679/18 OPR-Finance

Earlier today the European Court of Justice (CJEU) delivered its judgment C-679/18 OPR-Finance s.r.o. v GK on the interpretation of Articles 8 and 23 of Directive 2008/48/EC on Consumer Credit (CCD).

The facts

In April 2017 the consumer concluded a revolving credit agreement with OPR Finance for 192 EUR. After defaulting on payment of due installments, the creditor started enforcement action infront of the District Court of Ostrava (Czech Republic), claiming 307 EUR plus statutory interest. It appeared to  be clear for the referring court that OPR Finance did not claim they have assessed the consumers creditworthiness prior to granting the loan, and it was also clear that the consumer did not raise the objection of nullity  of the contract, the applicable penalty for failing to assess creditworthiness under Czech law.

The legal issues

The referring national court was unsure whether Article 8 on creditors obligation to assess consumers creditworthiness read in conjunction with Article 23 on the obligation of Member States to provide for effective, proportionate and dissuasive penalties for the breach of national provisions adopted pursuant to the CCD, provides for the national courts ex officio obligation to act i.e. obligation of national courts to examine on their own motion whether the creditors have complied with their obligation to assess consumers creditworthiness and ex officio obligation to apply the appropriate penalties provided by national laws.

At second instance, the national court asked whether the national provisions that provide for an obligation of consumers to raise the objection of nullity of the credit agreement within a 3 year time limit are contrary to the said provisions.

The ruling

The first question the CJEU answered positively, ruling that there is an ex officio obligation of national courts to examine whether creditors have complied with their obligation to assess consumers creditworthiness. Not only that national courts must assess ex officio whether the duty of creditworthiness assessment has been complied with but they should also apply the appropriate penalties ex officio, provided they are compliant with Article 23.

In its reasoning the CJEU referred to its previous case-law on establishing an obligation of national courts to rule ex officio on infringements of EU consumer law (para. 18), reinforcing the justification for such approach the weaker position of consumers vis-a-vis businesses in their contractual relationships (para. 19). It has also considered the importance of ex officio powers for achieving the objectives of the CCD. Importantly, it has highlighted that the purpose of Article 8(1) is to make creditors accountable for their lending decisions and to prevent them from providing consumers with unaffordable credit (para. 20). Moreover, the CJEU emphasized the importance of ex officio powers for the protection of consumers against the risks of over-indebtedness and bankruptcy and for the emergence of a well-functioning internal market in consumer credit with a high level of consumer protection (para. 21).

The CJEU further ruled that where national courts find the infringement of Article 8 on their own motion, they should also apply the appropriate sanctions without waiting for consumers to make applications to that effect, provided that national provisions on penalties are compliant with Article 23 and the associated CJEU on its interpretation (paras. 25-27). As mentioned above, under the applicable provisions of Czech law, the penalty of nullity of the contract only applied under the condition that consumers raised an objection of nullity within the limitation period of 3 years. The sanction of nullity itself relieved consumers from paying interest and associated costs to the credit, only requiring the repayment of the principle sum borrowed (para. 29). The CJEU examined the these requirements from the aspects of equivalence and effectiveness (paras. 32-33) and concluded that they are contrary to principle of effectiveness (para. 36). The said conditions make the sanction impossible or excessively difficult to operate in practice. Importantly, the CJEU dismissed the relevance of administrative penalties of competent supervisory authorities, emphasizing the separation of civil and administrative penalties for breaches of consumer credit law (para. 37), given that such penalties have no effect on harmed consumers, consumers to whom the credit was granted in the infringement of Article 8 of the CCD (para. 38).

Concluding thoughts 

This seems to be a well reasoned judgment that provides additional important protection for consumers against the risks involved in borrowing and raises the responsibility of creditors for complying with their obligation to assess consumers creditworthiness. It is now important that national courts follow the judgment and use their powers where appropriate.