ECJ Holds that National Courts Must Exclude Rather than Modify Unfair Terms in Consumer Contracts

In a judgment of 14 June 2012, the Court of Justice of the European Union (“ECJ”) gave judgment on a preliminary reference from the Provincial Court of Barcelona (Audiencia Provincial de Barcelona) (Spain) concerning the interpretation of Article 6(1) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (“Directive 93/13/EEC”) (ECJ, case C-618/10, Banco Español de Crédito SA v. Joaquín Calderón Camino). Article 6(1) provides as follows: “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.”

The Spanish court wanted to know, first, whether Article 6(1) of Directive 93/13/EEC precludes EU Member State legislation that would prohibit a court, in assessing an application for an order for payment, from determining, of its own motion, whether a consumer contract term is unfair. Second, the Spanish court sought to determine whether EU Member State legislation giving courts the power to modify, as well as set aside, the content of unfair terms is compatible with Article 6(1). These questions arose in the context of an appeal by the Spanish bank Banesto against a decision of a Spanish court of first instance to reduce a contractual interest rate deemed to be unfair, in accordance with Spanish legislation. The procedure before the first instance judge had been initiated by Banesto, which had submitted an application for an order for payment after several months of non-payment by Mr Camino on his loan.

In its judgment in response to the questions raised by the referring Spanish court, the ECJ held, first, that a national court is required to assess, of its own motion, whether a contractual term in a consumer contract is unfair, where it has available to it the legal and factual elements necessary to do so. EU Member State legislation precluding a court from doing so in the context of an application for an order for payment therefore infringes Directive 93/13/EEC. The ECJ asserted that such legislation is liable to undermine the effectiveness of the protection which Directive 93/13/EEC gives to consumers (See, this Newsletter, Volume 2009, No. 6, pp. 4-5; Volume 2009, No. 10, pp. 3-4; Volume 2009, No. 12, p. 4; and Volume 2012, No. 3, pp. 3-4).

Directive 93/13/EEC considers the consumer to be in a weaker position than the seller or supplier, as regards bargaining power and level of knowledge. The ECJ stressed that there is a significant risk that consumers will not lodge the objection required to contest an application for an order for payment, due to legal costs, lack of information, and other factors. Therefore, an order for payment procedure initiated by a seller or supplier can deprive consumers of the protection that Directive 93/13/EEC intends, and EU Member State legislation requiring the consumer to object in order for the court to examine unfair terms is incompatible with the Directive.

Second, the ECJ held that Article 6(1) precludes EU Member State legislation allowing a national court to modify a term deemed to be unfair in a consumer contract. The ECJ reasoned that while an unfair term does not bind the consumer under Article 6(1), the contract itself remains binding for both parties if it is capable of continuing in existence without the unfair term. Thus, a national court can only set aside an unfair term. The ECJ reasoned that if courts were permitted to revise such a term rather than set it aside, this too could undermine the consumer protection intended by Directive 93/13/EEC, as a seller would likely continue to use unfair terms knowing that, even if declared invalid, the contract could still be modified by the court to safeguard the seller’s interests.

In a related earlier judgment from 15 March 2012 (ECJ, case C-453/10, Jana Pereničová and Vladislav Perenič v. SOS financ spol. s.r.o.), the ECJ held that when assessing whether a contract containing one or more unfair terms can continue to exist without those terms, a national court cannot, in the ECJ’s view, base its decision solely on the possible advantage to the consumer of the annulment of the contract as a whole. Directive 93/13/EEC aims to restore the balance between the parties while preserving the validity of contracts as a whole, not to abolish all contracts containing unfair terms (See, this Newsletter, Volume 2012, No. 3, p. 2).