EU Consumer 4 Unfair contract terms Flashcards
Why do we have Unfair Contract Terms Directive
On one side we have FREEDOM OF CONTRACT (right to predraft a contract) - why would you be able to later say that certain provision does not apply? You got them before concluding contract, you accepted them. Why would you have the right on not applying?
- To protect consumers: in Spain, practice by the court where they make preliminary rulings in especially banking contract terms
- In EU, it is not about protecting weak consumer - but because none of us is able to bargain and have TIME, EXPENSES, expenses, to argue with each and every contract. The sellers have their resources like lawyers to spend all the time to make the contract.
• This is the MARKET FAILURE: a consumer would have to get their own lawyers to check contracts and spend time etc.
o That means we have Market problem: RACE TO BOTTOM because the one offering good standard terms sees that everyone else has worse standard terms. So, adjusting to others, it results to worse standard terms. That is why you have to control standard terms to control the market
o Information asymmetries: the information in the market is not standardised and everyone put the price on the level which is defined as the perfect price
–> ADVERSE SELECTION: the good cars are leaving the market because they cannot get their information to the consumer
- In Switzerland High Court does not see standard terms having function in protecting consumers
Purpose of the Unfair Contract Terms Directive
Article 1: The purpose of this Directive is to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer.
Recital 6: […], in order to facilitate the establishment of the internal market and to safeguard the citizen in his role as consumer when acquiring goods and services under contracts…
Case C-147/16 Karel de Grote, para 54: “[…] the idea […] that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge, which leads to the consumer agreeing to terms drawn up in advance by the seller or supplier without being able to influence the content of those terms[…].”
Case C-147/16 Karel de Grote
para 54: “[…] the idea […] that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge, which leads to the consumer agreeing to terms drawn up in advance by the seller or supplier without being able to influence the content of those terms[…].”
Economic arguments for protecting against standard terms
Market failure: competition does not function in the realm of contract terms
- Information problem: consumer cannot understand which terms are more favorable
- Transaction costs are too high: consumer cannot hire a lawyer to understand and to bargain the terms (‘rational ignorance’)
- Contract terms have no signaling function like quality or price
All default rules in code of obligations are fair, but the seller was replacing them with their own standard terms.
Result: everybody uses the worst terms = race to the bottom
- All risks involved with the contract are transferred to the consumer
- Inefficient contracts
scope of application
Art. 3
A contractual term which has not been individually negotiated shall be regarded as unfair if ….
- been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract
The fact that certain aspects of a term or one specific term have been individually negotiated shall not exclude the application of this Article to the rest of a contract if an overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract
• Directive does not want to elaborate what is the standard term - differences between countries
burden of proof
Art. 3,4
Where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him (Art 3, 4).
• If you have redrafted terms, the company has to prove that it was negotiated
unimportant factors in the scope of application
Ø Whether the contract was concluded verbally or in written form;
Ø In case of written contract conclusion, whether the terms of the contract are contained in one or more documents;
Ø Whether these terms are used by traders, businesses or professions of a public nature.
Unfairness according to Directive 93/13
Art. 3 (1)
- (1) contrary to the requirement of good faith,
- it causes a (2) significant imbalance in the parties’ rights and obligations arising under the contract,
- (3) to the detriment of the consumer.
important: it must be SIGNIFICANT and also contrary to good faith.
discretion left to courts.
• To make it easier for lawmakers, Exemplary list of unfair terms in the Directive Annex
Art. 4 unfairness is assessed by
nature of the goods or services
the time of conclusion, circumstances and all other terms terms
Case C-226/12, Constructora Principado
Case C-226/12, Constructora Principado
on “significant imbalance”
para 21: “In that regard, the Court has held that in order to ascertain whether a term causes a “significant imbalance” in the parties’ rights and obligations under a contract to the detriment of the consumer, particular account must be taken of which rules of national law would apply in the absence of an agreement by the parties in that regard.
Such a comparative analysis will enable the national court to evaluate whether and, as the case may be, to what extent, the contract places the consumer in a legal situation less favourable than that provided for by the national law in force
! So the ECJ refers to default rules: you have the code of obligations that are majority of default rules that are balancing the interest of the parties. So, if there is a blank, it is filled with the default rules
Unfairness and Price
Unfair terms are in principle NOT about the price; if the price is too excessive = unfair bargain or disastrous is not an issue of EU consumer protection but it is an issue of national law.
- Liberal market economy: you have to bargain for yourself
However, if the clauses are so vague and untransparent that is if hard to understand e.g. interest rate. This is very common in banking contracts. In this case, you can control price term as it could be considered as an unfair term
Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language (Art 4, 2).
the transparency rule in prices
Unfair terms are in principle NOT about the price; however, non-transparent terms are still applying even when they refer to price
- -> Non-transparent rules are probably unfair
- Non-transparent price rules are likely unfair too, because it hinders the possibility from the consumer to compare with other possible contracts
- There is a need of controlling this since this is distorting the competition
- So the idea of this directive is not to intervene in liberal market economy but in making competition possible
Use of plain and intelligible language
Article 5: Securing transparency
In the case of contracts where all or certain terms offered to the consumer are in writing, these terms must always be drafted in plain, intelligible language.
= comparing to the method of calculation usually used and also the rate of the market
–> Ensuring competition.
Case C-421/14 Banco Primus, para 67
Case C-421/14 Banco Primus
on the use of plain and intelligible language:
“where the national court considers that a contractual term relating to the calculation of ordinary interest, […], is not in plain intelligible language, within the meaning of Article 4(2) of that directive, it is required to examine whether that term is unfair within the meaning of Article 3(1) of the directive.
In the context of that examination, it is the duty of the referring court, inter alia, to compare the method of calculation of the rate of ordinary interest laid down in that term and the actual sum resulting from that rate with the methods of calculation generally used, the statutory interest rate and the interest rates applied on the market at the date of conclusion of the agreement at issue in the main proceedings for a loan of a comparable sum and term to those of the loan agreement under consideration;”
issue of the ordinary interest / rate on the market
If the court does not understand the term, thus considering it unfair, it should compare the method of calculation in the ordinary interest / rate on the market. 1. Problem: when I realise that this term is unfair (even about the price like interest rate), how are we going to fill the gap?
A) no interest? Bank giving money, use it for five years without any interest - this might be a solution as well as a punishment for using vague terms. This means you are not getting anything instead.
B) The other option it to give at least the market interest rate: at the time of the contract conclusion, what was the market interest rate? Filling the blanks in the contract.
Problem of filling the gaps: What is problematic is that rescuing banks by giving the banks the rate what is at least on the market is not an incentive to give transparent terms. Because as a seller, I know that using the standard terms is that price of it absolutely transparent, knowing that not that many consumers go to the court, and at least you will end up getting the market price at the minimum.
- Another problem is that when you have a clause limiting liability, that would not apply - but what are we applying instead?
- In most of the codes you can normally exclude liability for light negligence, you can exclude in some countries for gross negligence, but certainly not for intentional negligence.
o Now, when I look into this term, should you say that at least you would exclude in favour of the bank light negligence? NO, then it would protect a bank that cannot be able to draft terms according to codes.
Now with price terms, this is bit more extreme. If I strike out a price term, it is for free. Shall I really do that? It is a policy decision that would be better taken by the parliament and include it in codes.
E.g. Swiss code on consumer credits: when you give credit to consumers, you have to check their credibility. If you are giving a personal credit without checking it, the swiss code says that this credit can be paid until the end of the credit time with no interest. It is a punishment of civil law - would you then as bank give credit like that? Of course not.
ECJ has several times underlined not to protect terms that are against national laws’ default rules. You should give the least possible.
Mandatory nature
Article 6: Member States shall lay down that unfair terms used in a contract concluded with a consumer by a seller or supplier shall, …, 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.
Joined Cases C-154/15, C-307/15 and C-308/15 Naranjo Gutierrez
