AG opinion in VKI v TVP Treuhand (C 272/18) - a test case for the Amazon judgment

Last week, a seemingly very technical opinion has been delivered in a case concerning the transparency of a choice-of-law clause included in a fiduciary contract to be concluded by non-professional investors with an investment firm, Verein für Konsumenteninformation (VKI) vs

TVP Treuhand- und Verwaltungsgesellschaft für Publikumsfonds mbH & Co. KG (C-272/18) The case was triggered by an action brought about by VKI, seeking to obtain an injunction prohibiting the defendant to use the choice-of-law clause in the contracts it concludes with non-professional investors.

From the point of view of consumer protection, the case poses two main questions: 

1. Does the Rome I Regulation, including its rules concerning consumer contracts, apply to contracts of the type at stake?
2. If it does, is the choice-of-law clause unfair for failing to comply with transparency requirements and hence misleading the consumers as to their legal position?

As to the first question, the AG concludes that neither of the exclusionary rules possibly relevant to the case leads to attracting the case outside the sphere of application of the Regulation. More in detail, the case does not concern the functioning of a legal person (excluded under art 1.2.e); it also does not concern contractual obligations related to the provision of services exclusively in a country different than the consumer's country of residence. The latter exclusion (art 5.4.b), the AG claims, must be interpreted strictly and autonomously - ie not on the basis of a possibly relevant national rule. Given that some of the services rendered under the contract were to be performed in the consumer's country of residence, this exclusion does not apply according to the AG. 

If the Regulation applies, then the choice of law clause is only of limited impact - according to article 6.2. of the Rome Regulation, choice of law in consumer contracts cannot deprive consumers of the protection offered by mandatory rules of law in the country where the consumer has their habitual residence. In so far as a choice of law clause purports to determine exclusively which rules apply to the contract, the Court has declared in its Amazon decision, such clause is misleading and unfair under Directive 93/13 (UCTD). According to AG Øe, the Court's previous finding is applicable to this case and, hence, the clause is unfair. 

The Amazon case, one should say, was welcomed by consumer advocates but is also object of criticism - inter alia, by Øe's colleague Hogan -, thus it will be interesting to see how the Court will respond to this question as it may indicate whether it intends to stand by its previous findings or reconsider/restrict them. 

CJEU in Romano v DSL (C-143/18): sorry BGB, you can't sail around EU law implementation

Today, the CJEU published its decision in a case we had reported on a few months ago, Romano v DSL. In this case, two consumers had taken out a loan - renouncing their right of withdrawal (RoW) in order to obtain immediate performance. In such cases, the 2002 Directive on distance marketing of consumer financial services prescribes the extinction of the RoW when the creditor's performance has been entirely delivered, ie once the consumers have actually received the money. 

The Romanos claimed that, ten years after entering the contract, they should still be entitled to withdraw because they had not been given correct information. Given that German courts did not recognise withdrawal in distance financial services to deserve different treatment than other transactions and hence ignored the restriction, they should have been told that they were actually entitled to withdrawal even after having nominally renounced the possibility. 

According to the AG, the position maintained by German courts was untenable under the Directive. As a consequence, there was also no misinformation on the side of the lender, who had correctly notified the consumers that they were giving up their RoW.  The Court follows this reasoning, which  seems to trump the German courts' quest for systematic consistence in view of the integral application of  the concerned EU directive. Nice try for the claimants, but no belated Easter egg in this case.

CJEU judgment in Salvoni: no extra consumer protection in cross-border enforcement

In May we reported on this blog on AG Bobek's Opinion in C-347/18 Salvoni v Fiermonte. The referring Italian court that was requested to issue a Certificate for the cross-border enforcement of an order for payment against a consumer in Germany under the Brussels I Regulation (Recast). The order appeared to be in breach of the Regulation's jurisdiction rules; the consumer was domiciled in Germany, not in Italy. Should the court review and rectify the order, or inform the consumer of the possibility to challenge its enforcement? In this respect, the court referred to the CJEU's case law on Article 47 EUCFR and the Unfair Contract Terms Directive. According to AG Bobek, however, such an "extra layer of protection for consumers" could not be read into the provisions of the Regulation.

The CJEU confirms this in its judgment of 4 September. First, it found that the Certificate-procedure under the Brussels I Regulation can be qualified as judicial in the sense of Article 267 TFEU. Therefore, the preliminary reference was admissible. Secondly, it held that the court that issues the Certificate does not have to (re-)examine (ex officio) the jurisdiction of the court that has given the underlying judgment, even if it involves a consumer. The CJEU made a distinction between jurisdiction (see e.g. Article 17(1) of the Regulation for specific rules on consumer contracts) and recognition and enforcement. In the latter phase, it is the party against whom enforcement is sought who must oppose it. Because jurisdiction is one of the opposition grounds, there is no violation of Article 47 EUCFR. The CJEU's case law on the Unfair Contract Terms Directive does not apply in the context of the Brussels I regulation, which contains rules of a procedural nature. 

As we pointed out earlier, this outcome is understandable in light of the Regulation's framework, which aims to enhance the free movement and rapid enforcement of judgments within the EU, in the light of mutual trust based on legal certainty. From a consumer protection perspective, it possibly leads to a gap in the effective judicial protection of consumers. Not only is a court that has failed to apply mandatory jurisdiction rules (ex officio) in violation of the Regulation not allowed to rectify this; it is not allowed to subsequently inform the consumer of her defence possibilities either.  

Banks prevented from manipulating reimbursements following early credit repayment - CJEU in Lexitor (C-383/18)

Today the CJEU issued a judgment in the case Lexitor (C-383/18). As we have presented the facts of this case before, we refer the readers to our description of the AG Hogan's opinion first - Early birds and credit costs' repayment... here. 

Article 16 Directive 2008/48 (Consumer Credit Directive, CCD) states that 'The consumer shall be entitled at any time to discharge fully or partially his obligations under a credit agreement. In such cases, he shall be entitled to a reduction in the total cost of the credit, such reduction consisting of the interest and the costs for the remaining duration of the contract'.

The dispute pertained to the interpretation of the last part of this provision ('reduction consisting of the interest and the costs for the remaining duration of the contract'), namely, whether it allowed for the compensation in case of an early repayment of the credit of fees and charges placed on the consumer by the credit institution but unrelated to the duration of the credit agreement (para. 21). The CJEU believes that is indeed the case based on the purposive approach to CCD provisions. Art. 16 CCD replaced previously binding Art. 8 of Directive 87/102 (old Consumer Credit Directive), which referred to the consumer's right to 'an equitable reduction in the total cost of the credit'. Art. 16 CCD intended to make the general right of 'an equitable reduction' more precise by adding that this reduction would pertain to both interest and costs (paras. 27-28). The total cost of the credit as defined in Art. 3(g) CCD encompasses all fees and charges, with the only exception of public notary costs. The total cost of the credit includes, therefore, also fees and charges that are unrelated to the duration of the credit agreement (para. 23). The general objective of the CCD is to ensure a high level of consumer protection (para. 29), which aim would be endangered if during an early repayment the consumer could only be entitled to the reduction of costs presented by the credit provider as dependant on the duration of the credit agreement. It is, after all, the credit provider that unilaterally determines the fees and charges, and their amount, which could facilitate the credit provider choosing to limit fees and charges related to the duration of the agreement (paras. 31-32). The credit provider's interests are protected during the early repayment of the credit by Art. 16(2) and (4) CCD, which allow the credit provider to deduct costs related to the early repayment and for the Member States to set rules on ensuring the fit of the early repayment with the particular credit terms (para. 34).

All in all, this is the positive judgment for consumers, as they can be assured that the early repayment would entail a fair reduction in the total cost of the credit, which could not be manipulated by the banks by arbitrary setting of special, one-off fees and charges.

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.

Full harmonisation of consumer credit rules re-explained - judgment in C-331/18 Pohotovosť

Last Thursday the Court of Justice delivered its judgment in C-331/18 Pohotovost’. The case forms part of the series of Slovak references concerning the interpretation of EU consumer law in the context of credit agreements. It is not to be mistaken with previous disputes involving the same creditor and focusing on Directive 93/13/EEC on unfair terms (especially C-470/12 Pohotovost' and C-168/15 Tomášová - see the relevant posts here and here). Rather, it revolves around disclosure duties laid down in Directive 2008/48/EC on consumer credit, and as such, presents a direct follow-up to the ruling in C-42/15 Home Credit Slovakia.

Facts of the case

The case involved a consumer who questioned his obligations under a credit contract, arguing that the creditor failed to comply with several disclosure duties set out in national rules implementing Directive 2008/48/EC. As we have learnt from Home Credit Slovakia, non-compliance with key disclosure duties may result in the credit being deemed as free of interests and charges - a sanction established among others by Slovak law, which the Court of Justice found to be compatible with EU law. 

Home Credit Slovakia, however, also addressed another important matter - the scope of disclosure duties which Member States can impose on the creditors in the first place. This part of Court's reasoning was not really surprising: the CJEU held that, due to the principle of full harmonisation, to which Directive 2008/48/EC is subject, Member States may not adopt information obligations which are not established in that act. In response to this ruling, the Slovak legislator decided to adjust the national act on consumer credit, among others by removing the duty to break down the payment of the credit in terms of the capital, interest and other charges. The consumer in the present case nevertheless sought to rely on precisely on that duty, arguing that, firstly, the legislative changes undertaken in response to Home Credit Slovakia were too far-reaching and, secondly, they could not be applied to him as the disputed agreement predated the legislative amendment. This faced the referring court with questions about the scope of disclosure duties in Consumer Credit Directive and the limits of its obligation to interpret national rules in conformity with EU law.

Judgment of the Court

The Court of Justice did not consider the dispute to be all that complicated and, in any case, did not find arguments to support the pro-consumer approach considered by the referring court. Firstly, no obligation to break down credit payment was found in Directive 2008/48/EC. As noted by the Court, Article 10(2)(h) refers merely to frequency of payments, Article 10(2)(i) to the right to receive an amortisation table, and Article 10(2)(j) to a statement showing the periods and conditions for the payment of the interest and associated charges, if charges and interest are to be paid without capital amortisation. As a result, the duty relied upon by the consumer in the main proceedings was precluded by the principle of full harmonisation. 

Secondly, the Court recalled that interpretation of EU rules provided in its judgments clarifies and defines the meaning and scope of these rules as they ought to be understood and applied from the time of their entry into force. It follows that a rule must be interpreted according to the CJEU judgment also when the legal relationship, to which it is applied, was established before that judgment. The referring court should, therefore, apply the law applicable at the time when disputed agreement was concluded in conformity with EU law, as interpreted in Home Credit Slovakia. While it is true that the requirement to interpret national rules in conformity with EU law cannot serve as the basis for an interpretation of national law contra legem, a national court cannot consider this to be the case merely because it would have to change the established, national case-law.

Concluding thought

The analysed case is not groundbreaking but it helps to systematise several important pieces of CJEU case law, notably on the principle of full harmonisation and interpretation of national rules in conformity with EU law. As regards the more specific context of consumer credit, the ruling should be read together with the previous judgments in C-76/10 Pohotovosť and C-42/15 Home Credit Slovakia. Some of the parties intervening in the proceedings observed that the consumer could also have relied on inaccurate definition of annual percentage rate - a matter which the previous case law clarified to his advantage. This shows that - regardless of the analysed judgment - Consumer Credit Directive leaves room for important safeguards of consumer interests.

Towards clearer Terms and Conditions... again

Be it pre-contractual information in terms and conditions or information on the processing of personal data in privacy policies, the truth is that the way businesses provide information to consumers generally leaves a great deal to be desired. In order to prevent this, and to better inform the informers, the Behavioural Insights Team (BIT) published a ‘Best Practices Guide’ on improving consumer understanding of contractual terms and privacy policies. These evidence-based guidelines are aimed at businesses and focus on ‘how’ to present information, rather than on the ‘what’. 

This study had a dual-focus: consumer comprehension of online contractual terms/ privacy policies and consumer engagement (i.e. the opening of full contractual terms or privacy policies). The study produced interesting, although not surprising, findings. In fact, the shortcomings of the information paradigm have been repeatedly studied and analysed, both at a practical and at a normative level. See, for example, what we previously reported here, here and here.

From the 18 measures tested, 6 proved to be effective, meaning that they showed evidence of increased consumer understanding or increased consumer engagement. The most effective measures are the display of important or unusual terms as Frequently Asked Questions (which increased comprehension in 36%), the use of icons combined with summaries to explain key terms (which increased comprehension in 34%) and telling customers how long it will take to read the policy (which increased opening rates of full terms and policies in 105%). Other effective measures include the use of illustrations and comics to explain step-by-step actions and processes, telling customers when it is their last chance to read information before they make a decision and showing customers the terms in a scrollable text box instead of requiring a click to view them. Also noteworthy is the fact that while BIT’s research showed that reducing a policy’s reading age level did not change comprehension levels for general customers, it showed evidence that such a measure helped people with lower levels of qualifications (increased comprehension by 16.9%).

Funnily enough, considering social media trends, adding emojis to contractual terms is amongst the measures that have no supportive evidence of increased understanding or engagement. Besides, well-known techniques like shortening the terms and conditions, using simpler language or resorting to summaries showed mixed evidence, which means that although they worked in some cases, they did not work in others. For example, presenting key points in a summary table increased comprehension of terms included in the summary, but it also decreased comprehension of terms not included in the summary. These findings show that a mere language simplification-based solution is not enough to fix consumer disinformation: measures such as simple language and summaries must be combined with visualization.

The study – which was commissioned by the UK Government – also demonstrates how regulators are well-aware of the consumer disinformation problem. However, it is rare to see a legislative instrument (both at national and EU level) incorporating explicit measures dealing with these (or with similar) findings. The only recent exception at EU level is the General Data Protection Regulation, which explicitly calls for ‘standardized icons’ and visualization as a means to increase transparency in the pre-contractual stage. This study is another reminder of the need for lawyers to work with information designers in order to increase and improve visualization of their terms and conditions.

Finally, it is important to stress that even though the effective measures led to an increase in consumer understanding and consumer engagement, the final numbers did not go above 58% and 34%, respectively. In other words, according to this study, around 40% of consumers still do not understand terms and conditions, while 66% of consumers do not open the full policies, even after the tested measures are implemented. This means that in order to reach an almost complete comprehension of pre-contractual information – or to guarantee that everyone understands what they are binding themselves to - we need additional solutions and new approaches.

Are contract summary templates transparent? - feedback opportunity

The European Commission asks for feedback on the draft contract summary template, which all consumers must receive from e-communication service providers. Commission aims to make this template 'clear and understandable' and to facilitate comparison of services of different providers, thus transparency is definitely one of the key points that should be considered during the evaluation. Feedback may be submitted until 9 September on this website.

Public call for information on online choice architecture for consumers

The Dutch Authority for Consumers and Markets (ACM) has published a call for information on online choice architectures for consumers. The questionnaire may be found on this website, with the deadline for submitting information being set at August 16. The gathered information is to be used in preparation of the 'Guidelines regarding online choice architectures'. Through these guidelines ACM intends to advice traders, which online behavioural persuasive practices could e.g. be assessed as unfair (deceptive or coercive) commercial practices, and which examples of online persuasion could be seen as exemplary.

When the going gets tough - the need for insolvency protection of travel organisers

As today's UK news bring about information about two major holiday providers (Super Break and Late Rooms) going into administration (Super Break and Late Rooms holiday firms go into administration), the scope of consumer protection measures is again at the forefront of many travellers' minds. Already the previous Package Travel Directive (Directive 90/314/EEC) required the Member States to ensure that package travel providers had sufficient insolvency protection, but these rules have been further specified and strengthened in the new Directive 2015/2302 on package travel and linked travel arrangements. The UK has implemented the new Directive in the Package Travel and Linked Travel Arrangements Regulations 2018.

At the moment, the European Commission is reviewing whether the Member States have completely and properly implemented provisions of Directive 2015/2302 into their national laws. What happens to travellers who have booked their holidays with Super Break and Late Rooms will be a good example, on which to check how effective the UK protection against the insolvency of the package travel organiser is. However, even if the insolvency protection has been properly arranged many customers of Super Break and Late Rooms are likely to end up dissatisfied. Why? 

Well, first: they may not have concluded a package travel or a linked travel arrangement contract, which means that they would not benefit from insolvency protection.

Travellers who have been inconvenienced and do not have a separate travel insurance (as then it is best to contact the insurance company), should then first check whether their holidays are a package holiday or a linked travel arrangement, as in both cases insolvency protection had to be assured. Generally, this means that the traveller booked at least two different types of travel services (accommodation, travel, vehicle rental, etc.) for the purpose of the same holiday with either the same trader or through a linked booking process. If only accommodation was booked, without travel or vehicle rental, then the question whether a booking of another travel service makes it a package holiday depends on the value and importance of the provision of this additional travel service in the overall context of the package travel contract. 

Second, even if they fall within the scope of protection, their holiday has likely been ruined.

In case of package travel holidays or linked travel arrangements, travellers may at least expect the full refund of the payments they have made for the purchase of the package (but not additional payments that e.g. have been made after the package has already been concluded - e.g. to purchase additional attractions at their destination) and repatriation, in case they were already on holidays. Unfortunately, it is unlikely that they will be able though to enjoy their holidays as the insolvency insurance does not have to ensure the possibility of travellers continuing with their travel plans.