Swiss franc loans and borrowers’ rights in the light of 4 important judgments of the European Court of Justice
By George Kazoleas, Lawyer
The EU Court of Justice has issued important decisions in
recent years on the issue of bank foreign currency loans, essentially in Swiss
francs, which has created significant case law useful for defending the
interests of borrowers who have been “trapped” by credit institutions in
contracts with abusive currency risk clauses resulting in undue overchargings.
In summing up this case-law, the European Court of Justice has reached the following main conclusions:
1.The loan agreement must set out in a transparent manner the exact functioning of the foreign currency conversion mechanism and the exchange rate clause so that the consumer can assess the financial consequences of this mechanism.
2.The borrower must be clearly informed by the bank that, by concluding a loan agreement in a foreign currency, he / she is exposed to a certain foreign exchange risk that he / she may find it difficult to cope with in the event of a devaluation of the currency against the foreign currency borrowed.
3.It is for the national court to examine, of its own motion, instead of the consumer in his/her capacity as plaintiff, the possible unfairness of the contractual clauses.
4.The cancellation of a foreign currency loan agreement containing an unfair foreign exchange risk clause results in retroactive effect, as this clause defines the subject of the whole loan agreement.
In particular, starting with the most recent decision in Case C-118/17 (Zsuzsanna Dunai v ERSTE Bank Hungary Zr), issued on 14 March 2019, the ECJ ruled that the national (in this case Hungarian) legislation which excludes the retroactive cancellation of a contract (CHF in this case) and includes an unfair currency risk clause is contrary to EU law and that the loan agreement should be annulled if it can not exist without that unfair term.
The Court in that judgment notes that an unfair term must, in principle, be considered to have never existed, so that it can have no effect on consumers, who must be able to be in the same legal and factual situation in which they would have been in the absence of the relevant term. As regards the term relating to the exchange-rate risk, the Court concludes that it defines the main subject-matter of the contract so that, in the event that the unfair nature of that term is demonstrated, the continuation of a contract containing such a term does not appear to be legally possible, which it is however for the national court to assess.
In Case C-51/17 (OPT Bank Nyrt and OTP Faktoring Követeléskezelő Zrt. V Teréz Ilyés and Emil Kiss), the ECJ on 20 September 2018 found that the abusive nature of an unclear contractual clause under which the borrower bears the currency risk and which does not reflect legislative provisions, can be subject to judicial review. According to the Court, financial institutions are required to provide borrowers with sufficient information to enable them to make prudent and informed decisions. This implies that the currency risk clause must be understood by the consumer both in formal and grammatical terms and as to its specific content.
Therefore, the average consumer, who is reasonably well informed and reasonably diligent and informed, should not only be aware of the possibility of devaluation of the currency against the foreign currency in which the loan is settled but also of assessing the potential significant consequences of such a clause on his/her financial obligations.
The Court also pointed out that the clear and comprehensible nature of the loan clauses must be assessed at the time of the conclusion of the loan agreement in the light of all the circumstances surrounding its conclusion and regarding to all the other clauses of the contract, although some of these clauses were declared or regarded as abusive and therefore annulled by the national legislation at a later date.
It also points out that it is for the national court to examine of its own motion, instead of the consumer in his/her capacity as the plaintiff, any unfair contractual clauses other than the exchange risk clause as if the consumer has at his/her disposal the necessary legal and factual information (see also Case C-397 /11 Erika Jőrös v Aegon Magyarország Hitel Zrt).
In the ECJ Judgment of 20.9.2017 in Case C-186/16 (Ruxandra Paula Andriciuc and Others v Banca Românească SA) it was considered that when a financial institution grants a foreign currency loan, it must provide the borrower with sufficient information in order to be able to take a prudent decision. The Bank must therefore provide the consumer with all the information necessary to assess the financial consequences of a clause regarding his/her financial obligations.
The Court in that judgment stated that financial institutions must provide borrowers with sufficient information to enable them to make informed decisions. This information should therefore not only concern the possibility of a revaluation or devaluation of the currency at which the loan was concluded but also the effect on the loan installments of the exchange rate fluctuations and the appreciation of the currency at which the loan agreement was concluded.
Consequently, the borrower must be clearly informed that by concluding a loan agreement in a foreign currency, he/she is exposed to a certain foreign exchange risk that he/she may find it difficult to cope with in case of a devaluation of the currency in which he/she receives his/her income. On the other hand, the bank should clarify the potential exchange rate fluctuations and the risks involved in concluding a foreign currency loan, especially if the borrower does not receive his/her income in that foreign currency.
In order to ascertain whether a term, causes a ‘significant imbalance’ in the parties’ rights and obligations arising under the contract to the detriment of the consumer, contrary to the requirement of good faith, the national court must assess for those purposes whether the bank dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations.
Finally, the first and well known ECJ decision on loans in Swiss franc on 30 April 2014, in Case C-26/13 (Árpád Kásler, Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt), inter alia accepted that the requirement of EU law on clear and unequivocal wording of the clauses requires not only that the clauses must be drafted in a clear and understandable way for the consumer from a literal point of view, but also that the contract should set out in a transparent manner the exact functioning of the foreign exchange mechanism provided for by the relevant clause and the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan, so that the consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it.
The Court also noted that in a situation in which a contract concluded between a seller or supplier and a consumer cannot continue in existence after an unfair term has been deleted, that provision does not preclude a rule of national law enabling the national court to cure the invalidity of that term by substituting for it a supplementary provision of national law. This approach allows the purpose of the Directive 93/13 to be achieved, consisting, inter alia, in restoring the balance between the parties, while preserving as far as possible the validity of the whole of the contract.
In summing up this case-law, the European Court of Justice has reached the following main conclusions:
1.The loan agreement must set out in a transparent manner the exact functioning of the foreign currency conversion mechanism and the exchange rate clause so that the consumer can assess the financial consequences of this mechanism.
2.The borrower must be clearly informed by the bank that, by concluding a loan agreement in a foreign currency, he / she is exposed to a certain foreign exchange risk that he / she may find it difficult to cope with in the event of a devaluation of the currency against the foreign currency borrowed.
3.It is for the national court to examine, of its own motion, instead of the consumer in his/her capacity as plaintiff, the possible unfairness of the contractual clauses.
4.The cancellation of a foreign currency loan agreement containing an unfair foreign exchange risk clause results in retroactive effect, as this clause defines the subject of the whole loan agreement.
In particular, starting with the most recent decision in Case C-118/17 (Zsuzsanna Dunai v ERSTE Bank Hungary Zr), issued on 14 March 2019, the ECJ ruled that the national (in this case Hungarian) legislation which excludes the retroactive cancellation of a contract (CHF in this case) and includes an unfair currency risk clause is contrary to EU law and that the loan agreement should be annulled if it can not exist without that unfair term.
The Court in that judgment notes that an unfair term must, in principle, be considered to have never existed, so that it can have no effect on consumers, who must be able to be in the same legal and factual situation in which they would have been in the absence of the relevant term. As regards the term relating to the exchange-rate risk, the Court concludes that it defines the main subject-matter of the contract so that, in the event that the unfair nature of that term is demonstrated, the continuation of a contract containing such a term does not appear to be legally possible, which it is however for the national court to assess.
In Case C-51/17 (OPT Bank Nyrt and OTP Faktoring Követeléskezelő Zrt. V Teréz Ilyés and Emil Kiss), the ECJ on 20 September 2018 found that the abusive nature of an unclear contractual clause under which the borrower bears the currency risk and which does not reflect legislative provisions, can be subject to judicial review. According to the Court, financial institutions are required to provide borrowers with sufficient information to enable them to make prudent and informed decisions. This implies that the currency risk clause must be understood by the consumer both in formal and grammatical terms and as to its specific content.
Therefore, the average consumer, who is reasonably well informed and reasonably diligent and informed, should not only be aware of the possibility of devaluation of the currency against the foreign currency in which the loan is settled but also of assessing the potential significant consequences of such a clause on his/her financial obligations.
The Court also pointed out that the clear and comprehensible nature of the loan clauses must be assessed at the time of the conclusion of the loan agreement in the light of all the circumstances surrounding its conclusion and regarding to all the other clauses of the contract, although some of these clauses were declared or regarded as abusive and therefore annulled by the national legislation at a later date.
It also points out that it is for the national court to examine of its own motion, instead of the consumer in his/her capacity as the plaintiff, any unfair contractual clauses other than the exchange risk clause as if the consumer has at his/her disposal the necessary legal and factual information (see also Case C-397 /11 Erika Jőrös v Aegon Magyarország Hitel Zrt).
In the ECJ Judgment of 20.9.2017 in Case C-186/16 (Ruxandra Paula Andriciuc and Others v Banca Românească SA) it was considered that when a financial institution grants a foreign currency loan, it must provide the borrower with sufficient information in order to be able to take a prudent decision. The Bank must therefore provide the consumer with all the information necessary to assess the financial consequences of a clause regarding his/her financial obligations.
The Court in that judgment stated that financial institutions must provide borrowers with sufficient information to enable them to make informed decisions. This information should therefore not only concern the possibility of a revaluation or devaluation of the currency at which the loan was concluded but also the effect on the loan installments of the exchange rate fluctuations and the appreciation of the currency at which the loan agreement was concluded.
Consequently, the borrower must be clearly informed that by concluding a loan agreement in a foreign currency, he/she is exposed to a certain foreign exchange risk that he/she may find it difficult to cope with in case of a devaluation of the currency in which he/she receives his/her income. On the other hand, the bank should clarify the potential exchange rate fluctuations and the risks involved in concluding a foreign currency loan, especially if the borrower does not receive his/her income in that foreign currency.
In order to ascertain whether a term, causes a ‘significant imbalance’ in the parties’ rights and obligations arising under the contract to the detriment of the consumer, contrary to the requirement of good faith, the national court must assess for those purposes whether the bank dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations.
Finally, the first and well known ECJ decision on loans in Swiss franc on 30 April 2014, in Case C-26/13 (Árpád Kásler, Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt), inter alia accepted that the requirement of EU law on clear and unequivocal wording of the clauses requires not only that the clauses must be drafted in a clear and understandable way for the consumer from a literal point of view, but also that the contract should set out in a transparent manner the exact functioning of the foreign exchange mechanism provided for by the relevant clause and the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan, so that the consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it.
The Court also noted that in a situation in which a contract concluded between a seller or supplier and a consumer cannot continue in existence after an unfair term has been deleted, that provision does not preclude a rule of national law enabling the national court to cure the invalidity of that term by substituting for it a supplementary provision of national law. This approach allows the purpose of the Directive 93/13 to be achieved, consisting, inter alia, in restoring the balance between the parties, while preserving as far as possible the validity of the whole of the contract.
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