In the joined cases of Banco Santander SA v. Demba and another (Case C-96/16) and Cortes v. Banco de Sabadell SA (Case C-94/17), the European Court of Justice (ECJ) considered the application of the Unfair Contract Terms Directive (Directive) in two joined cases concerning the rate of default interest in consumer loan agreements, which were referred by the Spanish courts.
The Unfair Contract Terms Directive
The Directive protects consumers from unfair terms included in contracts. In Spain, the Directive is implemented into national law via the LGDCU (Ley General para la Defensa de los Consumidores y Usuarios y otras leyes complementarias (Royal Legislative Decree 1/2007)). The LGDCU provides that the test of fairness can be applied to all terms not individually negotiated and all practices not expressly agreed. A term may be deemed unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.
Facts of the cases
The ECJ was asked to provide a preliminary ruling on certain questions referred by the Spanish courts in two joined cases:
(i) In the first case, the default interest rates on unsecured loan agreements (concluded between individual borrowers and Banco Santander) were 18.50 per cent and 23.70 per cent, compared to ordinary interest rates of 8.50 per cent and 11.20 per cent, respectively. After the borrower’s defaulted, the bank sought enforcement of its claim by assigning its debt to a third party in accordance with Spanish law.
(ii) In the second case, an individual’s mortgage loan agreement with a bank provided an ordinary interest rate of 5.5 per cent per annum, which was subject to change after the first year, and which was 4.75 per cent at the time of the main proceedings. The default interest rate was 25 per cent per annum. The consumer argued that this was unfair.
The national court referred a number of questions to the ECJ, some of which related to the practice of lenders assigning debt to a third party and others related to the enforcement of unfair contractual terms which we have focused on below:
(i) Fairness of contractual term setting default interest rate
Question: The national court referred the question whether, in a loan agreement concluded with a consumer, a non-negotiated term that fixes the default interest rate is unfair, on the basis that the consumer is required to pay a disproportionately high sum in compensation, if they default on the loan, when that interest rate is two percentage points higher than the ordinary interest rate provided for by that agreement.
ECJ Decision: The ECJ confirmed the principle that national courts are entitled to stipulate that certain clauses are automatically unfair. The Spanish Supreme Court established case law that non-negotiated contractual terms must be unfair if they provide for a rate of default interest which is more than two percentage points above the rate of ordinary interest. According the ECJ, the court had followed the ECJ’s guidelines for assessing unfairness of a contractual term (Mohamed Aziz v. Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Case C-415/11)).
The Supreme Courts of Member States are entitled to elaborate certain criteria in the light of which the lower courts must examine the unfairness of contractual terms. The development of a criterion by the Spanish courts was wholly consistent with the objective of the Directive.
(ii) Consequence of unfairness of term fixing default interest rate
Question: The Spanish national court also asked whether the Directive precludes national case law, whereby the consequence of a non-negotiated term fixing the default rate of interest in a consumer loan agreement would result in the complete elimination of that interest, while the ordinary interest provided for in that agreement continue to run.
ECJ Decision: The ECJ stressed that though Article 6(1) of the Directive requires national courts to refrain from enforcing unfair terms against consumers, national courts are not empowered to revise unfair terms. This means, that after deletion of the unfair term, the contract must continue in existence without further amendments. If the continuity of the contract is not legally possible, the whole contract is null and void, unless the annulation is detrimental to the consumer. In that case, it is possible that a national court substitutes a provision of domestic law for an unfair contractual term.
The approach of the national court to refrain from applying an unfair considered default rate term, without substituting alternative provisions, while maintaining the contractual term concerning ordinary interest, was consistent with the Directive.
The decision by the ECJ provides useful guidance to Member States in applying the Unfair Contract Terms Directive. It confirms that national courts have the power to “blacklist” certain types of clauses as automatically unfair. It is also clear from the ruling, however, that any such judge-made rules must be consistent with ECJ case law and the objective of the Directive.
See here for the ECJ judgement of the joined cases.