A recent verdict by the European Court of Justice of 23 April 2015 (ECJ – C-96/14) casts serious doubts on German law and jurisdiction concerning control of general terms and conditions and its compatibility with European Law.
According to Sec. 4 (2) EU Directive 93/13/EEC (Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts) assessment of the unfair nature of the general terms and conditions of a contract shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration in so far as these terms (hereinafter referred to as “the terms”) are in plain intelligible language. Hence, only if the terms are not intelligible, they shall be subject to assessment of unfairness and its invalidity may be determined. Invalidity of the terms, therefore, requires determination of intelligibility of the term in a first, and assessment of unfairness of the term in a second step (two-step-model). This two-step-model is confirmed by recitals 19 and 20 of the directive. According to recital 19 assessment of unfair character shall not be made of terms which describe the main subject matter of the contract or the price ratio. Concerning insurance contracts the main subject matter includes the terms that define or circumscribe the insured risk and the insurer’s liability. According to recital 20 contracts should be drafted in plain, intelligible language. Therefore, only if the terms which describe the main subject matter of the contract or the price ratio are unintelligible, they are subject to assessment of fairness. This is reasonable. For, if the terms are clear, there is no reason why the insured should be able to invoke its unfairness.
German jurisdiction does not comply with these guidelines. Pursuant to Sec. 307 (3) sentence 1 German Civil Code (“BGB”) the main subject matter of the contract is not subject to assessment of fairness at all. However, the German Federal High Court of Justice has decided that this exclusion only includes the so-called “essentialia negotii”, meaning the core of the contract that would leave the insured without coverage if it ceased to apply. This interpretation of the term “main subject matter of the contract” is to narrow. It does not take into account the interpretation of the term under European law which also includes all terms that circumscribe the insured risk and the insurer’s liability.
This leads to the following inconsistencies regarding German consumer protection law: According to Sec. 307 sub-sec. sentence 2 BGB the main subject matter of the contract is subject to assessment of intelligibility, which can according to German jurisdiction pursuant to Sec. 307 sub-sec. 1 sentence 2 BGB per se lead to the invalidity of the term. German jurisdiction does not require the assessment of unfairness in a second step although Sec. 307 sub-sec. 3 sentence 2 BGB refers to Sec. 307 sub-sec. 1 sentence 2 BGB in conjunction with Sec. 307 sub-sec. 1 sentence 1 BGB which stipulates that general terms and conditions are ineffective if they unreasonably disadvantage the other party. Therefore, despite the clear wording of Sec. 4 (2) EU Directive 93/13/EEC that stipulates a two step model (determination of intelligibility and assessment of fairness) and the reference to sub-section (1) sentence 1 German jurisdiction only demands unintelligibility of the terms to consider them invalid. This clearly violates European Law. As a consequence, with regard to insurance contracts, if the term regarding the main subject matter was considered unintelligible, the insured would be left without a claim against the insurer at all. As German jurisdiction interprets the term “main subject matter of the contract” as referring to the essentiala negotii only, this is practically always the case. Therefore, German jurisdiction does not apply this consequence in order to preserve coverage for the insured.
These inconsistencies could be avoided if German jurisdiction would extend its understanding of the term “main subject matter of the contract” in line with European law with regard to insurance contracts and include the terms that define or circumscribe the insured risk (definition of the claim) and the insurer’s liability (risk exclusions). Thus, the control of general terms and conditions according to Sec. 307 sub-sec. 3 sentence 2 in conjunction with Sec. 307 sub-sec. 1 sentence 2 BGB could actually have legal consequences without leaving the insured without coverage. Furthermore, German jurisdiction should in conformity with European law apply the two-step model which is already provided for in Sec. 307 sub-sec. 3 sentence 2 BGB and has recently been confirmed by the European Court of Justice by verdict of 23 April 2015 (ECJ – C-96/14). In the verdict it is clearly pointed out that terms referring to the main subject matter of the contract are only subject to assessment of unfairness if they are unclear. Only if the unintelligibility of the term is determined, it shall be subject to judicial control and might be rejected.