ECJ in Home Credit Slovakia (C-42/15): MS can impose written form for the conclusion of credit contracts

Last week, the Court of Justice issued its decision in Home Credit Slovakia, C-42/15. We have already covered the AG's opinion on this case, which was largely followed by the Court. For this reason, the comment here is limited to the two most complex questions discussed and decided by the Court.

Background: the Consumer Credit Directive (art 10.1) provides that “credit agreements shall be drawn up on paper or other durable medium”.  It then makes a list of 22 elements of information which should be included in said agreements.

Slovakian law requires credit contracts to be concluded “in writing”, which means that offer and acceptance have to be signed. This contract to be concluded in writing has to include all the elements mentioned by the consumer credit directive.

The facts of the case are largely unremarkable, except for the fact that  we know a few of the elements which the Directive and Slovakian law require to be included in the contract were not specified in the document signed by the parties, but only in the lender’s terms and conditions .

The main questions before the court of justice were:

•     whether the directive requires all the information to be contained in a single document, ot whether it allows part of that information to be provided in a different document, aka the provider’s standard terms of business;
•            whether a requirement under national law that all the information be included in one document- or that if part of the information is contained in a separate, unsigned agreement, the contract cannot have full legal effect - is precluded by the directive.

The AG had discussed at length the Slovak translation of the Directive’s text, and had ended up  discussing separately the compatibility of national legislation possibly imposing as well as not imposing the requirement that the information be all included in a single document.

When discussing expressly the possibility that national legislation allows for the information to be split among different documents, the AG went on to explain (para 52 of her Opinion) what conditions would make this acceptable in line of the Directive’s requirements.

The Court does not discuss much whether allowing the information to be split among different documents is in line with the Directive, since “there is nothing in the Directive to indicate that the credit agreements referred to in that provision must be drawn up in a single document” (para 30).

The Advocate General found this potentially more problematic, and included the requirements in her conclusions- there is no trace of the same nuance in the Court’s decision. On the other hand, the Court is more explicit on the fact that the formal requirements for the conclusion of a credit contract are left for the Member States to determine (para 39 ff), and avoids entirely the “single document” issue- which allows them not to make any reference again to the relationship between the standard terms and the text of the agreement. While the Advocate General assumed that the “in writing” obligation and the single document would go hand in hand, the Court is suggesting a different interpretation- namely that national laws could be seen to require that both the main text and the standard terms should be signed by the consumer. 

Consumers' attitudes to Terms and Conditions (T&Cs)

The European Commission has published a study on "Consumers' attitudes to Terms and Conditions" conducted by a consortium consisting of Ecorys, Tilburg University, University of Amsterdam and GfK. The legal expertise was provided for this study by Marco Loos (CSECL, University of Amsterdam) and Joasia Luzak (CESL, University of Exeter; CSECL, University of Amsterdam). Within the study experiments were conducted to, among other things, examine how quality cues impact consumer attitudes to standard terms and conditions, whether the length and complexity of text of disclosure matters etc. The Commission announces that the results of this study will inform the ongoing review of EU consumer and marketing law, as they are relevant both for the revision of Unfair Contract Terms Directive and the Digital Single Market proposals. No specific plans have yet been announced though.

The final report is available here.

Abstract:

Previous research has shown that when buying products and services online, the vast majority of consumers accept terms and conditions (T&Cs) without even reading them. Although by not reading the T&Cs consumers are disempowering themselves, this behaviour can be viewed as rational from a cost-benefit perspective. As such, it would be unrealistic but arguably also unnecessary to expect all consumers to read and comprehend all T&Cs that they encounter: In most cases these T&Cs will not have an impact on the performances of the parties. On the other hand, even in such cases consumers may want to have a short look at the T&Cs in order to assess the reliability of the trader with whom they are about to conclude a contract. Therefore, this research took on a dual approach as to how to help consumers assess the substantive quality of the T&Cs.

The first approach was to increase readability. We investigated whether readership and understanding would be increased by shortening and simplifying the T&Cs. The assumption was that some consumers are motivated to be informed about (specific parts of) the T&Cs before making a purchase. If consumers are motivated to read the T&Cs, they should be able to understand this information. This approach is in line with the case-law of the Court of Justice pertaining to the requirement in Article 5 of the Unfair Contract Terms Directive (UCTD) that terms and conditions must be drafted in plain and intelligible language. According to the Court, this requirement implies that terms must be drafted in such language that the average consumer can foresee, on the basis of clear, intelligible criteria, the economic consequences which derive from these terms for the consumer. Shorter and simpler T&Cs could contribute to the readability of the T&Cs and therefore to better consumer decisions regarding whether or not to conclude the contract with a particular trader.

The second approach was to create effortless awareness. This approach was not focused on increasing the share of consumers who read the T&Cs per se. Rather, it investigated how consumers can be made more aware of the content of the T&Cs, or at least of the quality thereof, without them spending much more effort. To that extent, we investigated whether trust in the T&Cs and purchase intentions would be increased by adding a quality cue to the online store, such as the presence of a logo of a national consumer organisation accompanied by the statement “these terms and conditions are fair”. The assumption was that when the T&Cs were accompanied by such a statement, consumers would trust the content of the T&Cs more and would therefore be more willing to conclude a contract with that trader compared to traders that did not accompany their T&Cs with such a statement. Again, this may then contribute to better decision-making by consumers regarding whether or not to contract.

 

On the basis of our findings, we have made the following policy recommendations:

1. To improve readership, T&Cs could be presented in a default exposure format.

- The study shows that where consumers can access the T&Cs by clicking on a link, only a small percentage of consumers (9.4%) opened the T&Cs in the absence of a quality or reading cost cue. When the T&Cs were directly provided on the screen and consumers had to scroll through them, only 22.1% indicated that they did not read the T&Cs at all, compared to the 90.6% in the voluntary exposure experiment. How much readership can be improved by this measure needs to be investigated in further experiments that directly compare free and default exposure conditions on the same outcome measure.

2. To improve readership and understanding, T&Cs could be standardised and presented in a simple and short format, containing no more than the most relevant information.

- From the perspective of general consumer law and product-specific regulations, certain information must be disclosed to consumers by traders. Standardised forms for providing this information may facilitate reductions in length. This study suggests that T&Cs do not need to be long and complex, and traders actually have a commercial and legal interest in keeping T&Cs short and simple.

- When the T&Cs were simplified and shortened, more consumers indicated that they had read the T&Cs. For example, when the T&Cs were extremely short and simple, 26.5% reported to have read the whole T&Cs compared to only 10.5% in the standard long and complex T&Cs condition. Consumers also understood the T&Cs better when they were short and simple. This was found on an objective comprehension test about the content of the T&Cs as well as on consumers’ self-report on how easy or difficult it was to comprehend the T&Cs.

- Moreover, consumers’ attitudes towards the T&Cs were influenced by the length and complexity of the T&Cs. Simple and short T&Cs were trusted more than long and complex ones. Consumers were also more satisfied with the content of the T&Cs, felt less frustrated while reading them, and felt that reading them was more worth their time when the T&Cs were simplified and shortened. It should be emphasised that in this part of the experiment the length and complexity of the T&Cs differed but their substance did not. This suggests that it is indeed the length and complexity of the texts as such that influence the trust that consumers have in the fairness of the T&Cs, irrespective of the content.

- Importantly, consumers indicated that they did not miss relevant information in the short and simple T&Cs. Thus, despite shortening them, the T&Cs appeared to contain all relevant information of the longer version, at least from consumers’ viewpoint. This suggests that the shorter T&Cs were at least equally effective in providing the necessary information as the longer and more complex T&Cs.

- The effects did not depend on whether the online store was domestic or foreign (meaning that the effects were present on both types of online stores), and hardly differed between countries.

- Shortening the T&Cs is in line with other European legislative instruments. In this respect it is important to note that under the Consumer Rights Directive (CRD) traders need to present a list of information items in a clear and comprehensible manner before the consumer is bound by the contract. This information needs to be actively presented to consumers and cannot be buried in the T&Cs. Similarly, relevant practical information could possibly be included in the FAQ section at a website instead of in T&Cs, thus further enabling traders to shorten the T&Cs.

3. To improve readership of T&Cs, a statement with an estimation of the time it takes to read the T&Cs could be added (a reading cost cue). If providing such a reading cost cue is made mandatory it may also work as an incentive for traders to reduce the length of their T&Cs.

- Experiment 2 showed that readership of the T&Cs was influenced by the presence of a reading cost cue. In one condition, we added the message that “reading the terms and conditions takes less than five minutes” next to the link by which the T&Cs could be accessed. This reading cost cue increased the number of consumers opening the T&Cs from 9.4% to 19.8%. Moreover, the time spent on the T&Cs indicated that when a reading cost cue was present, respondents who opened the T&Cs also spent, on average, more time on that page than respondents who opened the T&Cs when no such reading cost cue was present.

4. To increase effortless awareness of the T&Cs, quality cues may be helpful. Customer feedback, national consumer organisation endorsement, and European consumer organisation endorsement cues can be used, as they positively influence trust and purchase intentions. The most positive effects are achieved with a national consumer organisation endorsement cue on domestic online stores, and with a European consumer organisation endorsement cue on foreign online stores.

- Adding a quality cue indicating that the terms and conditions are fair had an effect on consumers’ trust in the T&Cs and their purchase intentions. Adding a customer feedback quality cue, an endorsement by a national consumer organisation, and an endorsement by a European consumer organisation increased trust and purchase intentions. These positive effects were found on domestic as well as foreign online stores (though more pronounced on domestic stores) and on existing as well as non-existing online stores.

- The quality cues were not all trusted to an equal extent. Although all cues had positive effects, a positive customer feedback cue was trusted the least, indicating that (supposed) endorsement by customers is trusted less than (supposed) endorsement by a consumer organisation. Which of the consumer organisation endorsement cues was trusted the most depended on the type of online store. On domestic online stores, a national consumer organisation endorsement cue was trusted the most. On foreign online stores, a European consumer organisation endorsement cue was trusted the most.

- A promise-to-be-fair by the seller and expert endorsement sometimes decreased trust and purchase intentions. This study therefore does not find evidence to support the promotion of such quality cues.

– Adding a quality cue seems to be effective on both familiar and unfamiliar online stores, although the effects appear to be larger on familiar online stores. Preliminary study 2 highlighted that the positive effects of adding a quality cue are more pronounced on existing (familiar) than on non-existing (unfamiliar) online stores. A similar result was found with subjective familiarity. The main study did, however, also find positive effects on non-existing (unfamiliar) online stores (experiment 3). Taken together, these findings suggest that the effects of adding a quality cue are present on existing (familiar) and non-existing (unfamiliar) online stores, although the effects are sometimes more pronounced on existing (familiar) online stores.

- When deciding on whether to add a quality cue to an online store, differences across Member States do not appear to be so large as to warrant that they be given much weight.

5. Policy may also focus on raising general and specific awareness, thus making consumers more aware of their basic rights.

- Both preliminary studies demonstrated that consumers’ knowledge of consumer rights (general awareness) is limited. Interestingly, consumers' self-reported knowledge is not equally low, indicating that consumers are generally unaware of their lack of knowledge.

- In order to raise general awareness, one can think of information campaigns initiated by governments, consumer authorities, or consumer organisations through media channels or at the point-of-purchase (e.g. when entering a mall).

- Finally, policy may focus on raising specific awareness. An example is that information about the delivery period and length of the right of withdrawal and commercial guarantee must be mentioned on the first page/screen of the order form, as this is typically the type of information consumers need before they can make their decisions.

 

A victory for the banks? Opinion in high-profile cases on Spanish 'floor clauses'

Opinion of Advocate-General Mengozzi in Joined Cases C-154/15, C-307-15 and C-308/15 (Gutiérrez Naranjo v. Cajasur Banco, Palacios Martínez v. BBVA and Banco Popular Español v. Irles López) 

elmundo.es

This morning, Advocate-General Mengozzi presented his Opinion in three high-profile cases that have generated a lot of attention in Spain. These cases go far beyond the parties' interests and are perceived as being part of an ongoing battle between "the banks" on the one hand and "the consumers" on the other. They originate from a disagreement between the Spanish Supreme Court (Tribunal Supremo) and lower courts about the required level of protection under the Unfair Contract Terms Directive (93/13/EEC). The subject matter of the three cases are the so-called cláusulas suelo (literally: 'floor clauses'), i.e. minimum interest rate clauses, used by banks in mortgage loan agreements. In Spanish media, today has already been called "D-Day" for cláusulas suelo. 

What are cláusulas suelo? AG Mengozzi explains: "Those clauses allow a banking institution which grants a variable rate mortgage loan to impose a lower limit on the variable interest rate, so that even if the applicable interest rate [e.g. EURIBOR] is below a certain threshold (or 'floor'), the consumer will continue to pay minimum interest equivalent to that threshold." Such 'floor clauses' were common practice in Spain. In a judgment of 9 May 2013, the Tribunal Supremo declared cláusulas suelo to be unfair. In short, it found that those clauses were not transparent: consumers were unable to foresee the economic and legal burden the contract would place upon them.

The present cases concern the effects of this judgment, more specifically the question of retroactive effect. Under Spanish law, the general penalty for unfair terms is invalidity, which creates a right to full restitution. To what extent can consumers claim restitution of the amounts paid on the basis of 'floor clauses'? According to the Tribunal Supremo, such a refund is only due from the date of the judgment, 9 May 2013. It held that the temporal effects of its judgment could be limited under the principles of legal certainty, fairness and prohibition of unjust enrichment, because the banks had acted in good faith and there was a risk of serious economic difficulties (cf. the CJEU's judgment of 21 March 2013, C-92/11, RWE Vertrieb). However, lower courts have questioned the date from which the refund should begin. Is the Tribunal Supremo's limitation of the restitutory effects produced by an unfair - and therefore, under Spanish law, invalid or void - contract term compatible with the interpretation of "non-binding" in Article 6(1) of Directive 93/13? Should the refund of the amounts paid by the consumer on the basis of the unfair term arise only on the date of a court decision confirming the unfairness, or from the date the contract was concluded?

Advocate-General: Tribunal Supremo's approach is permissible 
AG Mengozzi first establishes that the Tribunal Supremo, by classifying 'floor clauses' as unfair terms in particular because of a lack of sufficient prior information, has not afforded a higher level of protection to consumers than that offered by Directive 93/13 and that thus, ascertaining the requested interpretation is relevant (paras. 43-50). He refers to the CJEU's case law (inter alia, its judgment of 30 April 2014, C-26/13, Kásler) to conclude that the requirement of transparency within the meaning of Article 4(2) of Directive 93/13 must be understood in a broad sense: not only should the relevant term be grammatically intelligible to the consumer, but the consumer should also be able to assess the economic consequences resulting from the application of that term, including the calculation of the repayments and interests.

As regards Article 6(1) of Directive 93/13, AG Mengozzi considers that the expression "non-binding" is neutral. He then moves on to say that the CJEU seems to have considered the invalidity of unfair terms not as the only way to satisfy the requirement that unfair terms are non-binding (para. 60). The CJEU has not decided that national courts must declare those terms invalid and create a corresponding right to restitutio in integrum (para. 64). From 9 May 2013, 'floor clauses' must cease to exist in the Spanish legal order: they must be eliminated from existing contracts and can no longer be included in new contracts. Therefore, the full effects of invalidity under Spanish law are guaranteed from 9 May 2013 and the effectiveness of Directive 93/13 is fully assured pro futuro. With regard to the prior period, AG Mengozzi observes that EU law harmonises neither the applicable penalties nor the circumstances in which a supreme court decides to limit the effects of its judgments. This means that the present situation falls within the national procedural autonomy of the Member States (para. 68). In AG Mengozzi's view, the Tribunal Supremo's approach - the temporal limitation - is permissible in the light of the principles of equivalence and effectiveness, provided that it remains quite exceptional (p. 73). While he disagrees with the alleged "innovative nature" of the judgment of 9 May 2013, AG Mengozzi points out that the Tribunal Supremo struck a balance between the protection of consumers and "the macroeconomic challenges to the already weakened banking system of a Member State" (para. 72). The safeguarding of legal certainty is "a concern shared by the EU legal order", "on account of the many legal situations which are potentially affected and which could undermine the stability of an economic sector" (para. 74).

A victory for the banks?
AG Mengozzi's consideration of "macroeconomic challenges" is in line with the Tribunal Supremo's argument that its judgment, without a restriction of the retroactive effect, would cause a risk of serious economic difficulties. It has been said that the risk for the Spanish banking sector is 3.500 million euros; no wonder that the AG's Opinion is perceived as a victory for the banks. Yet, the Opinion passes over a number of counter-arguments, brought forward on behalf of the consumers involved as well as by the referring courts.

First, it has been doubted whether the banks have actually acted in good faith.[1] As AG Mengozzi concludes, the judgment of 9 May 2013 was not really "innovative"; the CJEU's case law after that date is "nothing other than the logical continuation of a series of earlier judgments" (para. 49). Can it be said that the banks' "good faith" only ceased to exist on 9 May 2013? In addition, the banks themselves, who drafted and used the highly disputed 'floor clauses', were the cause of the lack of transparency making those clauses unfair. In this respect, AG Mengozzi's remark that the conditions governing the circumstances in which a supreme court may limit the effects of its own judgments fall within the scope of the Member States' national procedural autonomy (para. 80) is unsatisfactory, especially given the emphasis he puts at the same time on the balance struck by the Tribunal Supremo (paras. 72-74). If the Tribunal Supremo's reasoning is subjected to scrutiny in the light of the principle of effectiveness, the part on good faith could be more closely examined as well.

Secondly, the question has been raised whether the Tribunal Supremo's approach is contrary to the prohibition imposed on national courts of revising or altering the content of an unfair term (see, e.g., the CJEU's judgment of 14 June 2012, C-618/10, Banco Español de Crédito). AG Mengozzi does not answer this question directly. Perhaps limiting the effects of invalidity is not the same as varying the content of contract terms, the ratio behind this prohibition might nevertheless apply equally.[2] It is not entirely clear why the required "deterrent effect" (para. 71) should not date further back than 9 May 2013. One could argue that the banks are now rewarded for awaiting the Tribunal Supremo's judgment before changing their practice. In the words of Prof. Francisco de Elizalde (footnote [1]): "It could lead possible infringers to believe that the greater the damage, the more lenient the remedies."

Thirdly, AG Mengozzi appears to pay strikingly little attention to the position of consumers. Admittedly, achieving the balance sought by Directive 93/13 is not the same as favouring the consumer. But AG Mengozzi dismisses the plight of Spanish consumers too easily, where he says that a consumer who had concluded a loan agreement containing a 'floor clause' could simply repay one loan with another from a different banking institution, and that application of the 'floor clause' would not have led to a substantial change in the monthly amounts payable by consumers anyway (para. 73). He seems to overlook the economic risk mortgage loan agreements and 'floor clauses' pose to the consumer's household finances. His statement is all the more curious in relation to the finding of unfairness of those very same 'floor clauses'.

Finally, it is a pity that AG Mengozzi only spends one brief paragraph at the very end of his Opinion on the relationship between collective and individual actions (para. 81). In Case C-308/15, a specific question was asked by the referring court about the meaning of the right to effective judicial protection as enshrined in Article 47 of the EU Charter of Fundamental Rights in this respect (see para. 32). Not only does AG Mengozzi seem to deny the precedent effect of the Tribunal Supremo's judgments, he also does not seize the opportunity to propose a more systematic solution to the disparities between the Tribunal Supremo and lower courts (see also para. 23). He just presumes that the implementation by the lower courts is "likely to safeguard the principle of equality and the principle of economy of procedure" (para. 81), without even mentioning Article 47. Is this another missed opportunity? We will know when the CJEU renders its judgment in the cláusulas suelo saga. To be continued. 

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[1] See further: Francisco de Elizalde, 'The Rain in Spain Does Not Stay in the Plain - Or How the Spanish Supreme Court Ruling of 25 March 2015, on Minimum Interest Rate Clauses, affects European Consumers', EuCML 5/2015, pp. 184-187; link.
[2] The Commission, for example, has argued that the declaration of an unfair term as invalid "is not compatible with a limitation of the effects of such invalidation, unless such limitation is necessary to preserve the principle of res judicata" (see EurActiv).

AG Sharpston in Home Credit Slovakia: in consumer credit, information is EU strategy, but MS have much to say

The Consumer Credit Directive (2008/48) mentions 22 items of information that must be specified in the credit agreement in a clear and concise matter (compulsory information). But what if these "items" are not specified in the contract's main document, which the consumer signs, but in the Terms and Conditions attached to that document? This was the main question brought to the ECJ by a Slovakian court.

According to AG Sharpston's opinion in Home Credit Slovakia, C-42/15, the requirement contained in the Directive (article 10) that the contract must be concluded on paper or other durable medium must be interpreted as referring to the way in which the consumer must be given the contract and does not establish a formal conclusion requirement. In other words, the provision wishes to secure that the consumer has the information available in a way which allows going back to it; it does not imply that the document should also be signed. This conclusion is reinforced by the fact that the Directive expressly states that it does not affect national rules establishing specific requirements for the conclusion of contracts. 

Under Slovakian law, it is possible to argue that the information would have to be provided in the same document which the consumer had signed. According to AG Sharpston, a similar requirement is not included by the Directive but also not precluded by it (para 48). It furthers the consumer protection aims pursued by the directive, while not excessively hindering the access to credit contracts. 

On the other hand, the AG continues, the Directive also allows the "compulsory information" to be conveyed on a document different than the main contract, provided certain conditions are in place which secure the consumer's possibility to read that document before the conclusion of the contract and know what relevant aspects of the contract would be regulated in the Terms and Conditions (para 52).

The answers to some of the other questions in the application were much more straightforward: where relevant, the consumer is entitled under the Directive to receive an amortisation table at request, but not necessarily at the moment of the conclusion of the contract; and the contract has to state the fequency of the repayments, but not the exact dates on which they fall due. 

A possibly more controversial issue, namely whether a national sanction which penalises the failure to provide the necessary information by deeming the credit interest-free would be proportionate, can according to the AG not be answered based on the information available to the court. However, as the AG has it, a substantial part of the information would probably have to be omitted in order to justify a similar sanction. 

The AG's answer to the first question seems to want to avoid the question of whether the word "contract" also needs to be given a specific meaning under the Consumer Credit Directive, to mean the main text given to the consumer. This is a comprehensible move, as the relationship between that "main" contractual document and the professional's terms and conditions is a mine field which, once entered, may prompt more questions than it would answer. However, the choice to concentrate on interpreting "on paper" and allowing the core information to be split among documents requires the AG to invent a whole series of conditions (see, again, para 52) which, albeit reasonable in the light of the Directive's aims, are entirely her own creation. One may wonder whether the Court will show more courage or will also opt for this safe, albeit inelegant, path.