CJEU: national principles of procedural law cannot preclude courts from reviewing potentially unfair terms in consumer contracts
In a series of judgments adopted 17 May 2022, the Court of Justice of the European Union (Court) further developed its interpretation of the provisions of Directive 93/13/EEC on unfair terms in consumer contracts, particularly with regard to those national procedural principles which might impede the effective exercise of the rights that individuals – specifically, consumers – derive from EU law.
In the requests for a preliminary ruling submitted by Romanian, Italian and Spanish courts, the Court was asked to rule on whether national procedural principles, such as res judicata, may limit the powers of the national courts, in particular those dealing with enforcement proceedings against the consumer, in assessing whether contractual terms are unfair. Are principles of national procedural law which do not allow that assessment at the enforcement stage, including by the enforcing court of its own motion, because of the existence of prior national judicial decisions, compatible with Directive 93/13?
On the one hand, the Court emphasized the importance of the principle of res judicata – at both national and EU level – in ensuring the stability of the law and legal relations, as well as the sound administration of justice by requiring that judicial decisions which have become definitive, after all rights of appeal have been exhausted or after expiry of the time limits provided to exercise those rights (time-barring) no longer be called into question.
On the other hand, the Court pointed out that the system of protection introduced by Directive 93/13 is based on the idea that the consumer is in a weak position against the seller or supplier, as regards both his or her bargaining power and his or her level of knowledge. In respect of that weaker position, Directive 93/13 provides that unfair terms are not binding on consumers: this provision is mandatory, aiming to replace the formal balance of the contract with an effective balance.
As addressed previously in a two-part blog post (available here and here), this weaker position is especially problematic in consumer markets involving particularly complex transactions, such as the financial products and services market: as the European Commission noted in a 2010 paper, consumers are often ill-prepared to make sound decisions about retail financial products not only due to asymmetric information or limited financial literacy, but also due in part to instincts that drive consumers towards choices that might be inconsistent with their long-term preferences. Due to the difficulty of meeting the standard of a reasonable and well-informed 'average consumer', the protections afforded by the aforementioned provision of Directive 93/13 play an even more significant role in cases involving financial markets.
These observations are particularly relevant considering that the four cases in question involve proceedings between consumers and financial institutions operating in Member States. In three of the cases, enforcement proceedings have been initiated against the consumer; in the fourth case, the consumer applied for the repayment of sums wrongly paid under a term declared to be unfair.
In Case C-725/19 (Impuls Leasing Romania), the request for a preliminary ruling was made in proceedings concerning an objection to enforcement lodged by the consumer against enforcement measures relating to a leasing contract.
The Romanian court stated that while the leasing contract did contain certain potentially unfair terms, the Romanian legislation does not allow the court hearing the enforcement proceedings to assess – of its own motion or at the request of the consumer – whether the terms of a contract concluded between a consumer and a seller or supplier are unfair.
Instead, there is a separate action in which the unfairness of the terms of such a contract may be reviewed by the court hearing that action, during which the court hearing the enforcement proceedings has a discretion to suspend those proceedings. However, the consumer seeking suspension is required to pay a security based on the value of the contract, even though, as the Court pointed out, a debtor in default is not likely to have the financial resources necessary. In addition, these costs cannot dissuade the consumer from bringing court proceedings for the purpose of assessing the potential unfairness of the contractual terms.
Accordingly, the Court held that EU law does not permit such national legislation.
In Joined Cases C-693/19, SPV Project 1503, and C-831/19 (Banco di Desio e della Brianza and Others), the requests for a preliminary ruling were made in proceedings concerning the enforcement of instruments which have acquired the force of res judicata. The Italian courts hearing the enforcement proceedings were uncertain whether certain clauses and terms were unfair in the financing and guarantee contracts on the basis of which the creditors obtained the orders for payment which became final.
The courts noted however, that, in accordance with the principles of national procedural law, where there is no objection by the consumer, the force of res judicata of an order for payment implies the fairness of the terms of the guarantee contract even if there was no express examination by the court of the unfairness of those terms.
The Court found that such national legislation is liable to render meaningless the national court’s obligation to examine of its own motion the potential unfairness of contractual terms. The requirement of effective judicial protection necessitates that the court hearing the enforcement proceedings is able to assess whether the contractual terms serving as the basis for an order for payment – even those the debtor did not lodge an objection against – are unfair.
In Case C-600/19 (Ibercaja Banco), the request for a preliminary ruling was made in proceedings concerning a claim for payment of interest due to the bank on account of the failure by the consumer to perform the mortgage loan agreement concluded between those parties. It was not until the proceedings reached the enforcement stage – specifically after the auction of the mortgaged property – that the consumer pleaded the unfairness of certain clauses: that is to say, at a point where the effect of res judicata and time-barring neither allow the court to examine of its own motion whether the contractual terms are unfair nor the consumer to raise the unfairness of those terms.
According to the Court, EU law does not permit national legislation which, by virtue of the effect of res judicata and time-barring, neither allows a court to examine of its own motion whether contractual terms are unfair in the course of mortgage enforcement proceedings, nor a consumer, after the expiry of the period for lodging an objection, to raise the unfairness of those terms in those proceedings or in subsequent declaratory proceedings.
In Case C-869/19 (Unicaja Banco), the request for a preliminary ruling was made in proceedings concerning the failure of the national appeal court to raise of its own motion a ground relating to infringement of EU law. The bank granted the consumer a mortgage loan. The consumer later brought an action against the bank, seeking a declaration that the ‘floor clause’ of the agreement was void and the repayment of the sums wrongly received, arguing that that clause had to be declared unfair on account of its lack of transparency.
The first-instance court upheld the action, while temporally limiting the restitutory effects, pursuant to national case-law. The court hearing the appeal brought by the bank did not order the full repayment of the amounts received under the ‘floor clause’, since the consumer had not brought an appeal against the first-instance judgment. According to Spanish law, where part of a judgment is not challenged by any of the parties, the appeal court cannot deprive it of its effects or alter it.
This principle displays certain similarities with res judicata: the Spanish Supreme Court therefore asked the Court of Justice whether it was compatible with EU law, in particular considering that a national court, hearing an appeal against a judgment temporally limiting the repayment of sums wrongly paid by the consumer under a term declared to be unfair, cannot raise of its own motion a ground relating to the infringement of Directive 93/13 and order the repayment of those sums in full.
Recalling its case-law, the Court reaffirms that EU law precludes national case-law that temporally limits restitutory effects to amounts wrongly paid under an unfair term after the delivery of the judicial decision in which the finding of unfairness is made. The Court also finds that the application of such a principle of national judicial procedure is liable to make the protection of the aforementioned rights under Directive 93/13 impossible or excessively difficult, thereby undermining the principle of effectiveness.
In all cases, the Court pointed out the importance of the EU law principle of effectiveness: while it is the responsibility of the national court to assess of its own motion whether a contractual term falling within the scope of Directive 93/13 is unfair, Member States are required to provide for adequate and effective means to prevent the continued use of unfair terms. In principle, EU law does not harmonise the procedures applicable to examining whether a contractual term is unfair and those procedures accordingly fall within the domestic legal system of the Member States, however, national procedural principles must comply with the principle of effectiveness, that is to say fulfil a requirement for effective judicial protection. In conclusion, the Court found that, without effective review of whether the terms of the contract concerned are unfair, observance of the rights conferred by Directive 93/13 cannot be guaranteed.