The 1993/13/EC Unfair Contract Terms Directive (hereinafter: the Directive) is among the oldest European consumer protection instruments, and recently became a catalyst for major legal reforms with social impact, improving the lives of millions of consumers.
The financial crisis hit many consumers hard, in particular making their mortgage loans more expensive than anticipated. Loan instalments could eat up most of the consumers’ income, posing a serious risk of poverty and homelessness. Since the contract terms regulate much of the relationship between consumers and financial firms, the detriment could often be traced back to one or more unfair contract terms. When consumers asked their national courts to remove these from their contracts, the national courts sought help from the EU’s Court of Justice (hereinafter: the Court) in interpreting their unfair contract terms provisions that are based on the Directive. In doing so, national courts came to ‘unexplored territory’.
In over a decade prior to the financial crisis there had been few chances for the Court to interpret the Directive. The Court was mostly asked to clarify the scope of the Directive’s Art. 6, on the consequences of unfair terms. In doing so, it provided a valuable contribution to a high level of consumer protection e.g. obliging national courts to decide on the unfairness of a contract term also on their own motion, without an explicit request of the claimant and without establishing a time limit for asking national courts to rule on unfairness.
This recent case-law transformed the EU directive on unfair contract terms from being a “toothless tiger” to a potentially very powerful instrument.
Unfortunately, despite the fact that the judgements of the Court are binding, many of these decisions and instructions by the Court were not respected in practice, meaning that these achievements had a limited real effect on consumer welfare.
A sleeping giant
In addition, some important aspects, such as the meaning of “transparency” of consumer contracts under Article 5 and 4(2) which affects the drafting and interpretation of contract terms, did not get sufficient attention. The Court also refrained from taking advantage of the presented opportunities in interpreting the general concepts of “good faith” and “significant imbalance” in the Directive’s test of fairness in Article 3(1). Apart from the first casewhen the Court declared a jurisdiction term unfair, the Court repeatedly reiterated its inability to rule on the fairness of particular contract terms, stressing that its powers were limited to providing general guidance on the concept of fairness, leaving the application of these general rules to the facts of the case to the national courts. In giving general guidance, the Court generally did no more than to repeat the text of the Directive. For more than a decade, the protective effect of this essential piece of EU consumer protection law depended on national courts’ interpretations, without a tangible overall effect on European consumer welfare.
This was changed by the financial crisis and its aftermath, which resulted in a virtual torrent of cases. The increased case-load pushed the Court to be more interventionist, and the effect of these judgments went way beyond individual cases.
A paradigm shift
In 2013, the Court delivered its judgment in a landmark case known under the name of the consumer claimant “Aziz”. In this case the court considered the controversial Spanish mortgage enforcement procedure and ruled the national court’s inability to pause the mortgage enforcement procedure while the court rules on the fairness of a contract term is incompatible with European law. Importantly, the Court also gave general guidance on the understanding of the two limbs of the test of fairness in Art. 3(1) of the Directive and for the very first time gave guidance in applying those general principles to specific contract terms: to payment acceleration terms (terms that allowed creditors to call in the entire debt upon default) and terms that fixed the interest payable upon default. This judgment resulted in a major law reform in Spain. Incorporating the Aziz ruling, Law 1/2013 introduced important rules on making these loans cheaper and safer to use by capping the default interest and limiting the applicability of payment acceleration clauses (amending the Spanish Mortgage Act). It also strengthened the position of debtors in mortgage enforcement proceedings (amending the Civil Procedure Code).
Since the contract terms regulate much of the relationship between consumers and financial firms, the detriment could often be traced back to one or more unfair contract terms.
The Court delivered another landmark decision in 2016 on Spanish “floor clauses”, clauses that capped the minimum interest rate to ensure the banks do not suffer loss in case of negative interest rates. Although the Spanish Supreme Court had already established the unfairness of these clauses, it had limited the effect of its judgment to the future. When the cases were referred to the European Court of Justice, the Court found this approach incompatible with the Directive. It ruled that unfair terms must be regarded as never having existed, and thus the position of consumers must be accordingly restored. The judgment was followed by the adoption of another new Spanish Law 1/2017 based on which consumers that suffered losses must have been repaid affecting 2.5 million mortgage holders.
Finally, the case Kásler involved a mortgage loan indexed in foreign currency, a type of a loan common to many Member States causing particularly significant detriment in Hungary where these loans amounted to 90 percent of the mortgage portfolio. In Kásler, the Court delivered a valuable interpretation on Art. 4(2) of the Directive establishing that contract terms transferring the exchange rate risk onto consumers (where the banks more expensive selling rate of exchange was applied to calculate loan instalments) can only be exempted from the test of fairness (as an excluded “price” term) if they provide for an essential obligation under the contract and if they are understandable to the extent that consumers are able to estimate the economic consequences of the terms. This judgment ultimately resulted in the adoption of the Hungarian Act XXXVIII of 2014 that declared contract terms transferring the exchange rate risk onto consumers null and void, retroactively replacing these with the official exchange rate of the Hungarian National Bank. In addition, based on Act XL of 2014 banks were ordered to compensate individually every consumer for the loss that they have suffered.
The financial crisis and the surge of cases raised interesting (and perhaps for many controversial) questions on the relationship of courts and the legislator, however, in practice, these judgments delivered significant social justice for consumers. This recent case-law transformed the EU directive on unfair contract terms from being a “toothless tiger” to a potentially very powerful instrument, producing social justice effects that were probably not anticipated and that somewhat remained hidden as when one stands behind frosty glass.
Dr Andrea Fejos researches and teaches in the areas of consumer contract law and financial services law at the University of Essex (UK). She has published on a range of topics including on standard form contracts, unfair contract terms, consumer credit, consumer alternative dispute resolution and enforcement of consumer rights.