The Court of Justice of the EU (CJEU) has provided helpful guidance concerning the assessment of whether a term is unfair and contrary to the Unfair Contract Terms Directive 93/13/EEC (the Directive). The Directive (implemented in Ireland by the EC (Unfair Terms in Consumer Contracts) Regulations, S.I. No. 27/1995), applies to any term in a contract between a trader and a consumer, which has not been individually negotiated.
The case of Aziz v Catalunyacaixa C-415/11, 14 March 2013 concerned the validity of certain terms in a mortgage loan agreement entered into by the parties, and whether they were contrary to the Directive. The bank took foreclosure proceedings against a consumer, Mr Aziz, due to defaulting on his loan repayments. Mr Aziz responded by seeking a declaration for the annulment of a clause of the mortgage loan agreement, on the ground that it was unfair, and also of the foreclosure proceedings. The Spanish Court stayed the proceedings and referred the matter to the CJEU, as it was doubtful as to the conformity of Spanish law with the Directive.
The CJEU held that Spanish law contravened EU law, as it impaired the protection sought by the Directive, by making it impossible for a debtor to object to mortgage enforcement proceedings on the ground that a term of the relevant mortgage agreement was unfair. The Spanish government now has to ensure procedures are in place to allow borrowers to challenge the terms of their mortgage agreements on the basis they are unfair.
The decision serves as a reminder of the need to exercise caution when drafting business to consumer contracts as any particularly harsh terms may be deemed to be unfair, and accordingly not binding on the consumer.
The CJEU's judgment will assist national courts with assessing whether a contractual term falling within the scope of the Directive is unfair. The CJEU noted that Article 3(1) of the Directive merely defines in a general way the factors that render unfair a contractual term that has not been individually negotiated. It provides: "A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer."
The CJEU clarified that the concept of "significant imbalance" to the detriment of the consumer, requires the national court to consider the extent that the contract places the consumer in a legal situation less favourable than that provided for by the national law in force. To that end, an assessment of the legal situation of that consumer having regard to the means at his disposal, under national law, to prevent continued use of unfair terms, should also be carried out.
In assessing whether the imbalance arises contrary to the requirement of "good faith", the national court must determine whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to the term concerned in individual contract negotiations.