Recent decisions of the Romanian Constitutional Court (“RCC”) on some controversial pieces of legislation adopted by the Parliament in consumer credit area have largely affirmed that, in the pursue of the public objective of consumer protection, one should not cross the boundaries of good faith and equity in the performance of contracts.
On February 7, 2017, RCC admitted the unconstitutionality objection raised by the Government and decided that the Law for the supplementation of the Government Emergency Ordinance no.50/2010 on credit agreements for consumers (the “Law on conversion of Swiss francs loans”), which aimed at establishing, inter alia, an obligation of the creditor to convert the loans granted in Swiss francs to loans in Romanian lei, at the exchange rate valid at the date of signing the credit agreement, is unconstitutional in its entirety.
This decision comes after the one issued by RCC on October 26, 2016, whereby an unconstitutionality exception raised by a number of banks in respect of the Law on giving for payment was admitted. RCC decided that the provisions of the law stating the right of the borrower to transfer the mortgaged immovable asset in full discharge of the debt under the credit agreement are only constitutional to the extent that a court of law checks the conditions for the application of the hardship theory.
Constitutional judges have unanimously ruled that the Law on the conversion of Swiss francs is unconstitutional in full, considering mainly the following:
- Breach of the principle of two-chamber Parliament:
- substantial differences exist between the version of the law approved by the Senate, as compared to the one debated and approved by the Chamber of Deputies, both in terms of legal content and in terms of the objectives (reasons);
- in respect of the content, among others, the version of the law adopted by the Chamber of Deputies is limited to loans in Swiss francs, it provides for an obligation of the creditor to accept conversion at the exchange rate valid at the date of concluding the credit agreement and the right of the borrower to revert to the loan in Swiss francs, as opposed to the version adopted by the Senate referring to loans in foreign currency generally, providing only a right of the borrower to request conversion at the exchange rate valid at the date of conversion;
- the version of the law adopted by the Chamber of Deputies deviates from the objectives stated by the initiators of the law, i.e. to grant the consumers facing difficulties in the reimbursement of credit a right to request the conversion of loans in foreign currency into loans in Romanian lei, without creating unequal, discriminatory or differentiated treatment, with application to both existing and future credit agreements, by observing the principle of equality of rights;
- the Chamber of Deputies “eluded” from the debate and approval by the Senate essential aspects related to the structure and the philosophy of the law.
- Breach of other constitutional principles:
- in a credit agreement in foreign currency both parties undertake the risk that, during the performance of the contract, the reimbursed amount is worth, at the moment of reimbursement, less or more than at the moment of disbursement, by reference to other currency or to gold; the choice of a loan in foreign currency is a conscious and deliberated one, given some advantages (e.g. lower cost, access to a larger amount of money, possibility to make more investments) but having at the same time the possibility to identify disadvantages, including the risk to pay more money in relation to the currency in which the borrower obtains his incomes;
- however, the principle of reimbursement of the same amount of money in the same currency does not exclude application of the hardship theory when the relevant conditions are met; the credit agreement implies an “inherent risk” voluntarily assumed by the two parties, based on the free will in entering into agreements, and a “super-added risk” which exceeds the parties’ actual capacity to predict at the time of entering into the agreement; upon occurrence of the “super-added risk” the corrective intervention should become mandatory and effective for the future, leaving untouched the past performance under the contract;
- the performance of a civil law agreement is legitimate as far as two principles are applied cumulatively, the principle of the binding nature of the agreement and the principle of good faith performance, while the equity and good faith justify the hardship theory;
- the assessment of the unpredictable situation (the objective condition) and of the good faith in fulfilment of the contractual obligations (the subjective condition) has to be thoroughly made and it is the appanage of the court of law, thus ensuring the independence and impartiality of the assessment;
- in view of the legal framework existing at the time the credit agreements in Swiss francs were concluded, the new law should apply only to borrowers which cannot fulfil their reimbursement obligations as result of the occurrence of an external event that could not be foreseen when entering the agreement;
- if the conditions under the hardship theory are met, the court has the possibility to intervene in the agreement, either by terminating it or by adjusting it, with effects only for the future; this may involve application of the giving into payment provisions for the discharge of the debt or the conversion of the loan currency into national currency at an exchange rate which the court may determine based on the specific circumstances of the case, with the aim of re-balancing the obligations (such exchange rate may be the one as of the date of signing the credit agreement, the date of occurrence of the unpredictable event or the date of the conversion).
Although hardship was not regulated in the Romanian Civil Code in force at the time when most credit agreements in Swiss francs were concluded, and did not benefit from substantial recognition in the relevant case law, after the recent decisions of RCC we expect that the hardship in credit agreements in foreign currency is no longer challenged as applicable theory but merely subject to assessment of conditions in view of application.
One notable mention in RCC decision is that the clause stipulating that the loan has to be reimbursed in the disbursement currency is a clause keeping of “the main subject-matter of the contract”. As a consequence, such clause cannot be assessed from the perspective of the potential unfair nature (abusive clause or not), it being sufficient to be described in the contract in clear, plain intelligible language.
It may be encouraging for lenders and investors that rather populist initiatives of the Romanian legislator are tempered in view of constitutional principles, such as the state subject to the rule of law, free access to justice and administration of justice. However, in the Romanian civil law system, rulings of a court (except for decisions of the High Court for Cassation and Justice on the interpretation of matters of law) cannot be precedent, and are not binding for future court decisions.
In real life, although the path indicated by the Constitutional Court looks like an equitable solution, decisions passed by various courts in similar situations may be inconsistent or contradictory, as seen before in many areas and cases. One should not be surprised that, finding hardship conditions are met, a judge rules that the exchange rate applicable for conversion in order to re-balance the contractual obligation should be an average rate, while others rule for conversion to be made at the exchange rates most favorable to one party or the other.