Reconsideration or entrapment? Possible abuse of withdrawal rights under CRD, CJEU C-564/24

Over the past few days, one case has kept coming up in professional conversations which we have not covered so far - namely, Eisenberger Gerüstbau v JK (C-564/24), decided on 5 March, a new case concerning possible abuse of withdrawal rights. 

Facts and questions

In the case at hand, JK, the customer, had concluded a contract with Eisenberger Gerüstbau, a provider of scaffolding for building projects, to support the renovation/expansion works to be undertaken at a building owned by the consumer herself, for private purposes. The contract had been concluded with the assistance of an architect, who had drafted it as instructed by the consumer. The trader had signed the contract without making any changes. Signatures had been finalised in December 2020.

The scaffolding had been subsequently installed and held in place over a period of almost 12 months, during which the consumer had regularly paid a number of bills by the trader. In December 2021, when all the works for which the scaffolding had been indispensable had been concluded, the consumer indicated her wish to withdraw from the contract and demanded that all the money she had paid – close to 100 000 euros – be returned to her. The ground for her claim was that the trader had not informed her of her rights to withdraw from the contract, which would then be automatically extended from 14 days to 12 months and 14 days. The trader rejected the request and sued the consumer for the unpaid parts of the bill; the consumer counter-sued. 

 

The questions before the CJEU concerned two different aspects on which the referring court doubted on the way in which EU consumer law may apply to the case: first (questions1-3), whether the contract at hand (and modifications thereto) should be considered a distance contract for the purposes of article 2(7), Consumer Rights Directive, a necessary precondition for the application of the right to withdraw. Second (question 4), in case the contract had to be considered a distance contract under the relevant rules, whether in the case at hand the trader could legitimately claim that the consumer had exercised their right of withdrawal in a way that is contrary to good faith. 

 

The second issue was particularly laden (see para 37) as a result of a previous CJEU decision which had given pause to many practitioners, namely C-97/22. In that case, the court had upheld the right to withdrawal (and restitution of any expenses) for a consumer who had exercised their right after the contract had been fully performed. Could a different conclusion be reached in this case?

 

Reasoning and answers

As concerns the first question, the Court considered the three main elements that constitute the definition of “distance contract” under article 2(7) CRD, namely:” “any contract concluded between the trader and the consumer under an organised distance sales or service-provision scheme without the simultaneous physical presence of the trader and the consumer, with the exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded”. One of these aspects – the exclusive use of distance means of communication - seemed to be uncontroversial. Two, however, deserved closer scrutiny. First: was the customer acting as a consumer? The referring court seems to consider that if the consumer uses the services of a professional intermediary, they may not necessarily be considered a consumer in the relationship to third party providers hired through such intermediaries. The Court’s answer to this is relatively succinct, in so far as it concludes, relying on the AG’s opinion, that “a consumer was assisted by a trader, in the present case an architect, in the context of the negotiation and conclusion of a contract between that consumer and another trader, is not such as to call into question the weaker position […] of that consumer vis-à-vis that other trader, even though the trader who assisted that consumer took the initiative to establish the contact between that consumer and the other trader and influenced the content of that contract”. This may be a dubious reasoning as no effort is made to show why the use of a professional intermediary should not affect the presumption that a consumer “must be deemed to be less informed, economically weaker and legally less experienced” [para 44] than their counterparty. 

 

Perhaps unexpectedly, the CJEU has more doubts as to whether the contract in question should be considered as concluded “under an organised distance sales or service-provision scheme”. From the description of the negotiation, it is clear that the contract was concluded exclusively by means of distance communication, but not that the trader themselves had set out any “organised” scheme for such distance negotiations. In that sense, the CJEU concluded that it is up to the national court to decide whether the contract was a distance contract under article 2(7) of the CRD. 

 

The answers to the previous questions made it still meaningful to answer the question concerning whether the consumer could be considered to be exercising their right of withdrawal against good faith. In this sense, the Court reaches to its own case-law on the notion of “abuse of right”, which is known to be very demanding and as such helps the CJEU distinguish this case from the one decided in C-97/22. The Court first observes that it has in the past held that “the application of eU legislation cannot be extended to cover transactions carried out for the purpose of fraudulently oer wrongfully obtaining advantages provided for by EU law”. This is the case when it can be shown that first, “despite formal observance of the conditions laid out by the EU rules, the purpose of those rules has not been achieved”, and, additionally, “a subjective element consisting in the intention to obtain an advantage from those rules by artificially creating the conditions laid down” for obtaining that advantage. The Court refers here to its own Grand Chamber judgment of 21 December 2023, BMW Bank and Others (C-38/21, C-47/21 and C-232/21, paragraph 285), which concerned potentially abusive exercise of the “eternal” right of withdrawal in consumer credit agreements. 

 

The threshold imposed by these requirements is, in essence, high enough that it could overcome not only the general demands of a high level of consumer protection but also the punitive elements inherent in the specific rules at hand, which extend the right of withdrawal by 12 months when consumers have not been informed of this specific right. 

 

In this sense, the Court reasons, it is not enough to observe that a consumer has exercised their right of withdrawal towards the end of the extended withdrawal period. However, additional facts specific to this case may be relevant; in particular, the referring court may consider the fact that the contract was “concluded on the basis of a draft prepared under the sole responsibility of the consumer by an agent of her choice, in accordance with the information given by the latter as regards the precise services expected from the trader, which that trader then signed without making any amendments”[para 78]. This could suggest that the objective element of the abuse test – formal observance of the rules undermining the objective of those same rules – may be met. 

 

The circumstances of the case, the CJEU concludes, may further suggest that the subjective element of the test has also been met – the timing of the invocation of the RoW, right between the conclusion of the necessary parts of the work and the expiry of the 12-month window to exercise her right of withdrawal constituting a potentially relevant factor.

 

Some preliminary thoughts

The second question/answer discussed above is the main reason why the judgment has drawn some attention within legal circles. While similar implications could be drawn from the 2023 car lease cases, those cases were so steeped in a specific discussion and litigation saga that it was not immediately clear how broadly the CJEU may be willing to generalise the applicability of the abuse doctrine in consumer law. This case, of course, doesn’t answer this question either, being ultimately still about withdrawal rights. It does, however, help us make some tentative distinctions. First, abuse of withdrawal rights is more than the somewhat disproportionate exercise of said rights. It requires an ex ante dimension of creating a situation which gives rise to potential legal consequences, and at least explicit awareness of this dimension. This means, second, that the “windfall” a consumer enjoys when profiting from a trader’s mistake is not equivalent to abuse. This makes sense, in particular, in light of the Court’s consistent position that such consequences are both meant to provide consumers effective remedies and sanction the traders for non-compliance, thereby incentivising compliance. 

 

The previous question may get less attention, but I do want to reflect on two aspects that I find notable: first, I mentioned above that the reasoning with which the Court denies that the presence of an intermediary may mean the customer may not quality  as consumer under (in particular) the CRD does not sound particularly convincing. If we go with the Court’s own recalling that consumers must be assumed to be weaker in terms of knowledge, financial means and and legal savvy, it seems that – contrary to what the Court claims – the presence of a professional intermediary would by definition intervene to mitigate some of these asymmetries. An intermediary will likely be hired precisely to provide additional knowledge and (contract-specific) legal experience, and their involvement may even mean that the consumer has sufficient investment in the contract that they may be financially almost comparable to an entrepreneur. At the same time, while the reasoning may be weak (pun not too intended), it seems wise of the Court not to open up to broader questions about when the presence of an intermediary may matter to someone’s consumer capacity. This seems like a question that, if at all, should be properly addressed by legislatively set exceptions. The case-by-case appreciation of the role of the intermediary finds a more limited, and hence arguable more appropriate, role in the assessment of the potential abuse. Second, I find it interesting that the Court proposes a rather strict interpretation of the “organised scheme” element in the definition of a distance contract, suggesting that situations in which the trader does not systematically work online/through means of distance communication may not be automatically drawn under the application of the more demanding CRD requirements for distance contract by the mere conclusion of the contract by means of distance communication. 

Sanctions for Not Providing Essential Information in Credit Contracts - CJEU in Lexitor II (Case C-472/23)

Foto von Towfiqu barbhuiya auf Unsplash

The case concerned a debt collection agency (Lexitor), acting as an assignee of the rights of a consumer who had concluded a consumer credit agreement with a bank for an amount of approx. 9.000 EUR. In addition, the consumer was required to pay capital interest (approx. 4.500 EUR) and a commission fee (approx. EUR 1.100), whereas the Annual Percentage Rate of Charge (APRC) was specified at 11.18%. Lexitor argued that, since the APRC was partly calculated on the basis of unfair contract terms, the bank had failed to provide the correct APRC in the agreement. Consequently, Lexitor sought to recover the total sum of interest and costs as a sanction prescribed under national law. 

The first question was whether the creditor had failed to fulfil its obligation to provide the APRC in the credit agreement where the APRC was overstated due to certain contract terms being declared unfair. The Court emphasised that, although the actual APRC would indeed be overstated if calculated with reference to non-binding unfair contract terms, Article 19(3) of the Consumer Contract Directive (CCD; Directive 2008/48 on credit agreements for consumers) requires that the APRC be calculated based on the assumption that the credit agreement is to remain valid for the period agreed and that the creditor and the consumer will fulfil their obligations under the terms and by the dates specified in the credit agreement (para 34). Consequently, where the APRC is determined in accordance with the mathematical formula set out in Annex I to the directive - incorporating the total cost of credit to the consumer, including costs payable under the contract’s terms - the creditor does not infringe its obligation to provide the APRC in the credit agreement. This remains the case even if some of the terms on which the APRC was calculated are subsequently declared unfair and therefore not binding on the consumer (para 35).

The Court also addressed the question of whether listing various circumstances under which charges connected with the performance of the credit agreement may increase, without enabling the consumer to determine whether those circumstances have arisen, constitutes a breach of the creditor’s information obligation under the CCD. The Court referred to its established case law, holding that the terms of the credit agreement must be drafted transparently so that an average consumer can foresee, on the basis of clear and intelligible criteria, the changes that may be made to such charges (paras 41–44). Applying this principle to the contract terms in question, the Court concluded that where a credit agreement enumerates specific circumstances justifying an increase in charges without enabling the average consumer to ascertain whether those circumstances have materialised and their effect on the charges, this constitutes an infringement of the creditor’s obligation to provide information (paras 45–47).

Finally, the Court considered whether Article 23 CCD precludes national legislation that, in cases of infringement of the creditor’s obligation to provide information under Article 10(2) CCD, imposes a uniform penalty depriving the creditor of its right to interest and charges, irrespective of the seriousness of the infringement or its effect on the consumer’s decision. The primary concern was whether such a sanction would be proportional (para 51). Drawing upon its previous case law, the Court reaffirmed that Article 10(2) CCD sets out essential information that consumers must receive to assess the extent of their liability. A breach of this obligation may be sanctioned under national law by the forfeiture of the creditor’s entitlement to interest and charges (paras 53–54). The Court then turned to the specific circumstances of the case. Since the obligation to provide the APRC had not been infringed (first question), it focused instead on the conditions under which costs related to the performance of the agreement (such as commission fees) could be changed, considering this equally vital information under the CCD due to its impact on consumers’ financial obligations (para 55). The Court emphasised that the principle of proportionality does not preclude a Member State from imposing a uniform penalty depriving the creditor of its right to interest and charges for breaches of information obligations under Article 10(2) CCD, including those relating to the calculation of charges connected with contract performance, even where the gravity of the infringement may vary (para 57).

A Short Comment

The Court’s answers to the second and third questions are not surprising. It confirmed that the average consumer standard has been employed to assess the transparency of contract clauses under the CCD framework, as seen previously in BMW Bank, and has been extensively applied in consumer credit case law since Kásler. The response to the third question reaffirms that the information contained in a credit agreement (Article 10(2) CCD) is essential for the consumer to make an informed decision; consequently, failure to comply with this obligation may trigger sanctions under national law. The Court appears to have linked the proportionality of the sanction to the essential nature of the information provided.

The Court’s reasoning in relation to the first question, however, may be called into question. A literal interpretation of Article 19(3) CCD does not address the unfairness of terms used by the creditor but instead focuses on two distinct elements: first, that the APRC’s calculation is based on the assumption that the credit agreement remains valid for the agreed period; and second, that both parties will fulfil their respective obligations under the agreement. The unfairness of certain contract terms, on the other hand, means that they are null and void ab initio under Article 6(1) of the Unfair Contract Terms Directive, with the consequence that no obligations arise from them.

The first part of Article 19(3) CCD assumes the continued validity of the credit agreement. However, since finding the terms at issue null and void is unlikely to render the agreement invalid - as they do not appear to be essential to the contractual obligation (see Profi Credit Polska III, paras 68–70), although this must be verified under national law - this part of Article 19(3) CCD would not apply here. The same reasoning extends to the second part of Article 19(3) CCD: if obligations based on unfair terms do not exist ab initio, there is no obligation to fulfil on the side of any of the party.

It is also unclear how concluding that the APRC’s calculation, when partially based on unfair contract terms - leading to an overstatement of the APRC - does not infringe the information obligation under Article 10(2)(g) CCD, would contribute to achieving a high level of consumer protection. This raises at least three concerns.

First, in such cases, creditors would not face additional disincentives against using unfair terms in credit agreements. This appears inconsistent with Recital 20 of the CCD Preamble (“Creditors’ actual knowledge of the costs should be assessed objectively, taking into account the requirements of professional diligence”), which suggests that creditors could reasonably be expected to know when they are using unfair terms.

Second, since the APRC was overstated, it is unclear how the average consumer could accurately determine - not merely approximate - the extent to which the stipulated APRC would affect their future rights and obligations under the credit agreement. This appears to contradict the Court’s reasoning in its response to the second question, where the transparency of information is deemed crucial for consumer decision-making.

Third, it also seems to conflict with the Court’s reasoning in Pereničová and Perenič, here it held that an incorrect APRC constitutes false information regarding the total cost of credit and the price under Article 6(1)(d) of the Unfair Commercial Practices Directive (UCPD), as it causes or is likely to cause the average consumer to make a transactional decision they would not have otherwise taken (para 41). However, the Court may have drawn a distinction between cases where the actual APRC is lower than that stipulated in the contract (Lexitor II) and those where it is higher (Pereničová and Perenič), as well as between the transparency requirements under the CCD and those under the UCPD. Yet, these distinctions are not explicitly addressed in the commented judgment. Further clarification from the Court on this point would be necessary to provide much-needed clarity.

Transparency about online payments even if they are conditional - CJEU in Conny (C-400/22)

Last week, on May 30, the CJEU gave its judgment in the Conny case (C-400/22) elaborating on the requirement from Article 8 of the Consumer Rights Directive to clearly label an online obligation to pay on a website on a relevant button with the words 'order with obligation to pay' (or an equivalent of this).

Photo by Alice Pasqual on Unsplash

The facts of this case are interesting as it was a trader that tried to argue that the lack of clear wording on a website about an order with an obligation to pay should lead to the voidness of the concluded contract. The contract in case was a lease contract, concluded between a landlord and a tenant. Pursuant to German law, this lease contract had a ceiling on the rent that consumers had to pay and if this ceiling was exceeded, consumers could claim reimbursement of overpayments. Conny - a debt collection company - offered to collect the rent overpayments as an assignee of consumers rights. The contract between Conny and consumers was concluded online, via its website. Consumers had to approve T&Cs and click on a button to place the order, which button was not labelled with the required wording. The reason given for this was that the payment was conditional on Conny successfully securing the debt collection. Only at that time consumer would have had to pay a third of the annual rent saved, pursuant to T&Cs. The landlord used the lack of the proper labelling on Conny's website as an argument that the assignment of consumer rights was void and, that therefore, Conny could not have been successful in claiming repayment of rent from the landlord. 

Order with an obligation to pay - whether payment is conditional or unconditional

The CJEU clarifies, as expected, that the trader's obligation to transparently inform consumers concluding a contract through its website about an obligation to pay, just before a consumer binds themselves to this payment, does not change if the payment is dependent on satisfying a subsequent condition (para 56). This allows the consumer to explicitly acknowledge his consent to be bound by an online order with an obligation to pay (paras 43, 50). The CJEU points to the lack of distinction in the CRD between conditional and unconditional payments, as well as the duty to inform placed on traders when an order 'implies' an obligation to pay (paras 46-47). A different interpretation would have led to traders being able to explicitly inform consumers about their obligation to pay not at the ordering process, when consumers may still avoid the order and the subsequent payment obligation, but only at a time when the payment becomes due (para 52). Traders could then circumvent their duty to inform by placing in their T&Cs an objective condition, fulfilment of which would be required to lead to a payment obligation (para 53).

Sanction of voidability

An important clarification follows in paras 54-55 of the judgment. The CJEU emphasises the CRD's wording, which only states that a consumer is not bound by the contract in case the above-mentioned trader's duty has been breached. This does not need to indicate that a contract is void, but rather that a consumer has an opportunity to avoid it. This would make a significant difference in cases such as the one referred to the CJEU, when it is a trader who is trying to use an infringement of consumer protection rules as a 'weapon' against, ultimately, a consumer.

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).

Sanctioning EU-wide infringements: is there a need for an overhaul of the existing enforcement regime?

I recently read the news that the Commission announced taking steps towards fining Google, Twitter and Facebook for breaching EU consumer protection rules. The Commission has found that the standard terms and conditions of the three companies are continuously breaking EU consumer protection rules, for example by forcing European consumers to take their disputes to California courts (see the press release here). The Commission has warned the companies that sanctions will take place unless they bring their standard terms and conditions in compliance with EU consumer protection rules, the final deadline being now the end of September. However, although the breach affects consumers across the EU, the Commission is powerless in taking EU-wide action to protect every affected European consumer, and to defend the authority of EU consumer law. The Commission can only negotiate and exercise pressure by putting forward the prospect of being fined by Member States. However, final actions need to be taken by Member States and their respective authorities.

In spite of harmonizing substantive law, (public) enforcement of consumer law remains national. It is confined to national enforcement authorities, the Commission's role being simply in coordinating their activities via the Consumer Protection Cooperation (CPC) network. Consequently, EU wide infringements must also be addressed at national level. In the situation like the present one, the Commission cannot directly sanction businesses in breach of EU consumer law. Fines have to be ordered by national authorities. It makes me wonder whether this is the most effective and efficient way to enforce EU consumer Law? The one potentially huge fine is now sliced up on 28 slices, even if the aggregate amount of 28 fines would be higher than one single fine, the present solution requires considerable resources at Member States' level for conducting the enforcement procedure and for monitoring compliance with the sanctions. The slicing up the fines and the 28 independent enforcement procedures may undermine the preventive, deterrent effect of the sanction. The fact that the Commission negotiates with the companies but has actually no power to act may leave a confusing message as to the importance of EU consumer law. It looks like that harmonized substantive law rules fall apart at national level... Leaving aside aspects of effectiveness and efficiency, it looks like this approach may ultimately encroach on one of the  basic values on which the EU is founded upon, on the principle of the rule of law (Article 2 TFEU). It therefore begs the broader question as to whether there is a need to overhaul and improve the existing regime of the enforcement of consumer law by empowering the Commission to take enforcement actions against EU-wide infringements.

Even though there may be disagreements on the answer to the above question, and some may argue that enforcement of consumer law should stay national, it looks like that we may look ahead of some changes. According to the press release: 'EU lawmakers are currently negotiating a separate draft EU law that would give the Commission more power to directly sanction firms that violate consumer protection rules'.