This ruling2 is the outcome of a question referred for a preliminary ruling raised by Barcelona Commercial Court number 3 in July 2011, asking the Court of Justice of the European Union (CJEU) to state whether the Spanish system for mortgage foreclosure conforms to Directive 93/13/EEC on abusive clauses in consumer contracts (the “Directive”).

In this case, the mortgagor’s (consumer’s) home had been auctioned following foreclosure proceedings, which the mortgagor had not contested. Shortly before the property was to be handed over to the successful bidder, the mortgagor filed a complaint with the commercial court, petitioning the court to declare one of the clauses in the loan agreement (on penalty interest) null because of its abusive nature. When the Barcelona Commercial Court number 3 heard the complaint, it suspended the proceedings and sent the matter for a preliminary ruling.

The ruling mostly reflects the Attorney General’s conclusions, responding to the two preliminary questions as follows:

  1. The Court asserts that if the law of a Member State does not allow foreclosure proceedings to be contested on the grounds that a contractual clause is abusive, and does not allow the court judging the abusive nature of the clause to take interim measures, such as suspending the foreclosure proceedings, it does not comply with the Directive. The Court finds that Spanish law makes it impossible or excessively difficult to apply the protection granted under Directive 93/13 to consumers in mortgage foreclosure proceedings.
  2. Regarding whether specific clauses in the loan agreement can be considered disproportionate under the Directive, the Court refers the decision to the Spanish court, indicating that if there is a substantial material imbalance, the contract must leave the consumer in a less favourable legal situation than provided by current applicable domestic law. Thus, regarding the potential disproportionateness of clauses that allow long-term loans to mature early because of defaults over a short, limited period, the Spanish court must verify whether (i) the breached obligation has an essential nature, (ii) the breach of that obligation is sufficiently serious with regard to the term and amount of the loan, and (iii) Spanish law gives the consumer a way to remedy the effects of the loan maturing early. With regard to determining penalty interest, the Spanish court must assess the regulations applicable by default to the contract and to other consumer contracts of the same type, as well as the penalty interest, when compared to the legal interest rate. Regarding the “liquidity covenant,” under which the creditor may unilaterally calculate the amount of the debt to be foreclosed, the court must determine whether that clause is an exception to the rules that would apply by default and whether it obstructs consumers’ access to due process and their right to defence.