CJEU clarifies legal consequences of invalid loan agreement due to unfair terms
On 27 April 2023, the Court of Justice of the European Union (“CJEU”), in delivering a ruling in the case of MJ vs. AxFina Hungary Zrt. (Case C-705/21), considered the applicability of article 6 and 7 of Directive 93/13/EEC on unfair terms in consumer contracts (“Directive 93/13”) in the context of a loan agreement which included a contractual term placing the exchange rate risk on the consumer and which was considered unfair.
Within its preliminary ruling, the CJEU considered instances where a contract which includes an unfair term cannot continue in existence without such unfair term, and assessed whether the contract should be declared invalid or whether the national court should remedy the invalidity of the contract. The CJEU held that national courts should not remedy the invalidity of the contract unless there are exceptional circumstances which expose the consumer to particularly detrimental consequences which would penalise the consumer.
Background to the case and Judicial Proceedings before the Hungarian Courts
In February of 2008, the applicant entered into a loan agreement with AxFina Hungary Zrt’s predecessor to purchase a vehicle. The amount of the loan was 2,830,000 Hungarian forint (HUF) which was repayable over 120 months with interest amounting to HUF 920,862 payable for the duration of the loan. However, the loan was denominated in Swiss franc (CHF) and repayable in Hungarian forint. The repayment obligations of the applicant were impacted by the fluctuation in the exchange rate between Swiss franc and Hungarian forint.
A case was brought before Győri Ítélőtábla (Győr Regional Court of Appeal, Hungary) (the “Referring Court”) which declared that the loan agreement was invalid due to a clause within such agreement which was deemed to be unfair since it imposed the exchange rate risk on the customer. Subsequently, the proceedings were held before the Szombathelyi Törvényszék (Szombathely High Court, Hungary) in order to determine the legal consequences of the declaration of invalidity. Following this, the case was appealed and brought once again before the Referring Court. The Referring Court decided to stay the proceedings and referred the case to the CJEU for a preliminary ruling.
Legal Context and CJEU’s Legal Considerations
The CJEU held that in respect of contractual terms which are unfair, the objective of Directive 93/13 (including articles 6(1) and 7(1) therein) is to restore the balance between the parties and to preserve the validity of the contract as a whole and not necessarily to annul all contracts which include unfair terms.
Article 6(1) of Directive 93/13 provides that where unfair terms are included in a contract between a seller or supplier and a consumer, such unfair terms shall not be binding on the consumer and the contract will only bind the parties if the contract can continue in existence without the unfair terms. In light of this, the CJEU referred to previous judgements which declared that the court cannot modify a contract by revising the content of unfair terms but rather that unfair terms should be considered as though they never existed and without having an effect on the consumer. The CJEU referred to the importance of restoring consumers to the legal and factual position they would have been in had the unfair term not been included in the contract.
Article 7(1) of Directive 93/13 provides that adequate and effective means must exist to prevent the continued use of unfair terms in contracts which are concluded between consumers and seller or suppliers, and this in the interests of consumers and their competitors.
The CJEU reiterated the notion that enabling the national court to revise the content of the unfair term would negatively impact the intention of article 7(1) of Directive 93/13 which is to prevent the continued use of unfair terms in contracts with consumers. This is because sellers or suppliers may still be tempted to include unfair terms in their contracts, as should such contracts be considered before a court, the court could simply modify the unfair terms to the extent necessary and in a way which would safeguard the interests of the consumer but also of the seller or supplier. Consequently, the revision by national courts of unfair terms would not have a dissuasive effect on the use of unfair terms by sellers or suppliers.
It is for these reasons that the CJEU held that in order not to undermine the objective of Directive 93/13, the national court cannot remedy the invalidity of a contract (resulting from the unfairness of a term), by declaring that the contract is valid and by changing the currency and interest rate set in the contract or by setting an exchange rate ceiling.
Despite this, the CJEU held that where the removal of an unfair term would result in the contract not being able to exist without such term, thereby resulting in the cancellation of the contract, and where such cancellation of the contract in its entirety would be detrimental to the consumer and would result in the consumer being penalised, it would be possible for the unfair term in exceptional circumstances to be deleted and replaced by a supplementary provision of national law or a provision which the parties agree to, so that the contract is not cancelled.
The CJEU went on to state that in the absence of such a supplementary provision, or if the parties do not agree between them, and if the consumer has not indicated its wishes to maintain those unfair terms, the national courts, in accordance with Directive 93/13, must take all necessary measures for the protection of consumers from any consequences which may be particularly unfavourable. This includes the annulment of the loan agreement resulting in the seller or supplier immediately claiming the debt from the consumer as this would be prejudicial to the consumer.
The CJEU held that national courts may set out a framework for negotiations between the parties, in order to ensure that their rights and obligations are balanced, with particular focus on consumer protection as embedded in Directive 93/13. Moreover, the CJEU reiterated that it is possible for national courts to order lenders to repay sums which it has wrongly received (due to unfair terms in consumer contracts) in view of unjust enrichment. Moreover, it was held that the powers of national courts are not to extend beyond what is strictly necessary for the restoration of balance between the parties and the protection of consumers.
In light of the above considerations and in accordance with the aim of Directive 93/13, the CJEU concluded (amongst other things) that, where a term places exchange risk on the consumer and results in the invalidity of a loan agreement denominated in a foreign currency but repayable in national currency – due to the unfairness of such a term, without which the agreement cannot exist – article 6(1) and article 7(1) of Directive 93/13 prevents the agreement from being declared valid by changing the currency of the agreement or interest set out therein, or by establishing a ceiling on the exchange rate.
Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.
This article was published on The Malta Independent on 26/07/2023 and written by Dr Erika Gabarretta (Associate, Banking & Finance).