By way of the Judgment of the Court of November of the 25th of November 2020 in Case C-269/19 (hereinafter the “Judgment”), the Court of Justice of the European Union (hereinafter “CJEU”) ruled:
“[…] after terms establishing the mechanism for determining the variable interest rate in a loan agreement […] have been found to be unfair, and when that contract cannot continue to exist following the removal of the unfair terms in question, annulment of the contract would have particularly unfavourable consequences for the consumer and there are no supplementary provisions under national law, the national court must, while taking into account all of its national law, take all the measures necessary to protect the consumer from the particularly unfavourable consequences which could result from annulment of the loan agreement in question. […] nothing precludes the national court from, inter alia, inviting the parties to negotiate with the aim of establishing the method for calculating the interest rate, provided that that court sets out the framework for those negotiations and that those negotiations seek to establish an effective balance between the rights and obligations of the parties […]”.
The judgment of the European court was given at the request of the Cluj Court of Appeal. The latter considered that in order to determine the effect of finding as unfair the terms of a loan agreement which refer to the mechanism for determining the variable interest rate, an interpretation from CJEU with respect to the provisions of art. 6 of the Directive 93/13/EEC on unfair terms in consumer contracts (hereinafter the “Directive”) is necessary. According to this European legal provision:
“Member States shall lay down that unfair terms used in a contract concluded with a consumer by a seller or supplier shall, as provided for under their national law, not be binding on the consumer and that the contract shall continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair terms”.
This article contains:
· The factual situation which determined the requiring of an interpretation from CJEU;
· A brief analysis of factual situation;
· The analysis and possible effects of the Judgment.
1.2. The factual situation
It is no secret that the national courts of law have been called upon to settle an impressive number of civil cases having as object the finding as unfair of terms within agreements concluded between consumers and supplyers or sellers, especially over the past 6 years.
The fact that the majority of these cases refers to terms of loan agreements concluded by credit institutions and natural persons, as consumers is also well known.
The judgment refers to situations in which the national courts are required to find as unfair the terms establishing the mechanism for determining the interest rate provided by a loan agreement, with the following structure:
(a) Fixed interest rate during the first year, of x% per year, where x’s value is expressly provided within the terms;
(b) Variable interest rate after the first year: fixed margin of y% per year + a benchmark, z, different from EURIBOR 6M / LIBOR 6M (depending on the currency of the loan). This part of the terms expressly provides the amount of the fixed margin and states that z can suffer alterations and that the new amount is to be posted at the credit institution’s offices. The variation criteria for z are provided by the general crediting conditions, annex to the loan agreement as of the date of its conclusion. The same general conditions provide that the borrower has the possibility to choose an interest rate which varies exclusively according to EURIBOR 6M / LIBOR 6M, depending on the currency of the loan.
The starting point is that the terms establishing the mechanism for determining the variable interest rate, as provided by point (b) above have been found to be unfair.
The matter which the European court has been vested with refers to the concrete effects of the admission of such a request, given that (i) art. 6 of the Directive, previously quoted, states that the terms deemed as unfair should not be binding on the consumer and (ii) such an agreement, where a credit institution is the loaner, cannot continue to exist without the terms establishing the mechanism for determining the interest rate.
Up to this moment, at a national level, two solutions were given in majority:
i. the parties are invited to negotiate the mechanism for determining the interest rate, after the first year, due to the fact the court cannot intervene in the parties’ agreement and it cannot establish, without their consent, another level of the interest rate/another mechanism establishing the variable interest rate;
ii. the unfairness of the terms affects only point (b) above, due to the fact that the value of x is expressly provided by point (a), the borrower was aware of it and accepted it. As such, x shall be the value of the interest rate applicable after the first year as well.
Two other categories of solutions, in minority at a national level, but in majority in the jurisdictions of two courts of appeal, provide that:
i. after the first year, the margin, y% per year shall be applied, with no benchmark;
ii. the replacing, after the first year, of z with EURIBOR 6M/LIBOR 6M, depending on the currency of the loan. The formula, as established by the national court shall be y% + EURIBOR 6M / LIBOR 6M.
1.3. Brief considerations on the four categories of solutions
Pacta sunt servanda is a main principle in civil law. A natural consequence is that the agreement’s interpretation shall be done in accordance with the joint will of the parties.
The national law does not contain supplementary provisions in the domain under discussion. In general, the supplementary provisions establish a mandatory conduct for the parties in case that they did not agree on a certain conduct. Specifically, the national legislation does not provide the mechanism for determining the variable interest rate in the absence of the joint will of the parties.
Under these circumstances, the solution provided by point i. above appears to be the correct one: after determining the unfairness of a the terms establishing the variable interest rate, the contracting parties will be the ones entitled to agree upon a new mechanism.
The solution provided by point ii. above brings a change in the parties’ combined will, as it sets out the fixed interest rate initially agreed upon only for the first year, for the whole duration of the contract. One could argue that the intervention of the court is a minimal one, due to the fact that the parties were aware of this value and accepted it, at least for the first year.
With respect to points iii. and iv. above, we believe that they do not have any standing.
Firstly, in general, the consumers require the courts to deem as unfair the terms similar to point (b) above, as a whole. As such, according to the fundamental principle of disposability, applicable in civil procedure law, the admission of such a request entails that those terms, as a whole, will not produce mandatory effects with respect to the consumer. In other words, the court is not allowed to maintain only part of the term, meaning the margin of y% per year, establishing that this will be the level of the interest rate, absent the combined will of the parties. Additionally, if one could consider that the solution provided by point ii. can be subject to objection as it transforms a variable interest rate into a fixed interest rate, the same criticism can be brought against the solution provided by point iii.
Even if the plaintiff requests solely for the benchmark to be deemed as unfair and the court grants this request, the lack of suppmentary rules of law prohibit the courts to modify the content of the terms and to replace the benchmark with EURIBOR 6M / LIBOR 6M. If the parties would have wished to apply such a formula, they would have agreed upon it as of the conclusion of the contract.
1.4. Analysis and potential effects of the Judgment
CJEU has concluded that as a consequence of the finding as unfair of terms similar to point (b) above, nothing precludes the national court from, inter alia, inviting the parties to negotiate with the aim of establishing the method for calculating the interest rate, provided that that court sets out the framework for those negotiations and that those negotiations seek to establish an effective balance between the rights and obligations of the parties taking into account in particular the objective of consumer protection underlying the Directive.
As main grounds of the Judgment, we highlight:
· it is for the national court to exclude the application of the unfair terms so that they do not produce binding effects with regard to the consumer, unless the consumer objects;
· the contract must continue in existence, in principle, without any amendment other than that resulting from the removal of the unfair terms, in so far as, in accordance with the rules of national law, such continuity of the contract is legally possible
· when the national court finds that a term in a contract concluded between a seller or supplier and a consumer is unfair, that court cannot modify the contract by revising the content of that term;
· the consequences that should follow from the finding that a term in a contract concluded between a seller or supplier and a consumer is unfair must allow two objectives to be achieved. First, the court must ensure that the equality between the parties, which would have been undermined if a term of the contract that was unfair as regards the consumer was applied, is restored. Second, it is necessary to ensure that the seller or supplier is deterred from including such terms in contracts with consumers.
A review of the Judgment and the above reveals that CJEU has rephrased the question addressed by the Cluj Court of Appeal, maintaining, mainly, that the European court is called upon to determine whether in cases such as the one described, the national courts are allowed to establish a new mechanism for determining the interest rate or to invite the parties to establish such a mechanism, without setting benchmarks for those negotiations.
The European court concluded that (i) in the absence of supplementary rules of law, the national courts cannot modify the contractual term and (ii) nothing precludes the national courts to invite the parties to negotiate.
However, CJEU highlighted that the national courts should take into consideration the purpose of the Directive, to protect the consumers’ interests, who find themselves in a week position vis-à-vis the seller or supplier, as regards both bargaining power and level of knowledge.
CJEU pointed out that the national courts must establish the framework for those negotiations and must seek to establish an effective balance between the rights and obligations of the parties.
As such, given the mandatory effects of the Judgment vis-à-vis the national courts, each national court will have to analyze the factual situation in the trials which they were called to rule in and determine the most adequate negotiation framework, in order to establish the aforementioned balance.
It remains for the jurisprudence to outline, concretely, how the national courts will establish such a framework. In any case, this undertaking cannot be carried out by ignoring the content of the Judgment (e.g. the national courts will not be able to set out a range with unjustifiable low limits between which the negotiations will have to be carried out. Should such an event occur, it would only represent an indirect application of the solutions provided by points iii. and iv. above, which is strictly forbidden both by the Judgment as well as other similar previous acts of CJEU, such as the judgment rendered in case C-618/10).
CJEU did not decide that a ruling rendered by the national court will have to establish a general economic balance between a consumer and a seller or supplier. Such a result cannot be achieved. The balance mentioned within the Judgment is a juridical one, to be analyzed by taking into consideration the specific legal relationship within the trial. The national courts’ role continues to be that of ensuring consumers’ protection and not to punish the suppliers or sellers, by applying new mechanisms determining the interest rate which sometimes can even lead to null or even negative values of the interest rate.