Unfair terms in consumer contracts

McKeever Rowan Solicitors © 2023 all rights reserved.
Consumer Rights
Examining the stance of the Court of Justice of the EU and how it relates to Ireland

In Kancelaria Medius SA v RN the Court of Justice of the European Union (the CJEU) further outlined the reach of Directive 93/13/EC on Unfair Terms in Consumer Contracts (the ‘Directive’). The CJEU held that Courts of EU member-states must have the opportunity to scrutinise the terms of a contract between a business and a consumer before automatically issuing a tick-box judgement, even where the consumer fails to show up in Court.

In fact, the CJEU goes one step further and says the national Court must not only have the opportunity to scrutinise the contractual terms but that they are obliged to review the terms to ensure that those terms are not unfair to the consumer.

Factual and Legal background

In the Kancelaria case, the Plaintiff brought an action for repayment against the Defendant in a Polish District Court based on a consumer credit agreement between the Defendant and the Plaintiff’s predecessor, the original lender. The Defendant failed to appear at the proceedings. Notwithstanding this failure to appear the Court dismissed the Plaintiff’s action. The Polish Court held that the evidence submitted to it, which included a copy of a pro-forma contract without the Defendant’s signature, failed to establish the Plaintiff’s claim.

The Plaintiff appealed the decision to the Polish Regional Court arguing that the Polish Code of Civil Procedure required the Court to base its decision solely on the evidence presented. According to Article 339(2) of that Code, where a Defendant fails to appear for, or participate in, proceedings, the Plaintiff’s assertions of facts are to be considered true unless there are “reasonable doubts” regarding them. The Polish Regional Court (the “referring Court”) which referred the question to the CJEU, accepted that Article 339(2) applied to the proceedings and noted that the requirements for issuing judgement in default had been satisfied, as the Defendant had failed to mount a defence after being served with proceedings.

However, the referring Court had doubts as to whether Article 339(2) was in line with the Directive's standard of consumer protection. Specifically the Court questioned whether the Article was compatible with the requirement that the Court determines whether the terms of a consumer contract are ‘unfair’ within the meaning set out in Article 3(1) of the Directive which states that a contractual term will be considered unfair if, “contrary to the requirement of good faith, it causes significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer”.

The referring Court sought clarity as to whether the Polish Civil Code was compatible with the consumer’s rights under Article 47 of the Charter of Fundamental Rights, in circumstances where the national court was prevented from examining, of its own accord, whether the terms of a consumer contract were unfair. The referring Court questioned whether Article 7(1) of the Directive prevented the application of national rules which prohibit a national court, dealing with an application for a default judgement, from investigating whether the terms of a consumer contract are unfair. Article 7(1) of the Directive obliges Member States to ensure that appropriate and effective measures are in place to prevent the continued use of unfair terms in consumer contracts.

The Decision

Throughout its decisions the CJEU has consistently stressed the importance of the policy underpinning consumer protection laws and the public interest associated with that policy. It recognises that the purpose behind such legislation is to overcome the inherent imbalance of bargaining power and knowledge in the consumer and seller/supplier relationship. The Court referenced earlier decisions in which the CJEU held that the protection provided by the Directive extends to circumstances in which the consumer either does not raise the unfairness of a term in a concluded contract, or to where the consumer does not plead that a term in such a contract is unfair.

The procedure for establishing whether the terms of consumer contracts are unfair is governed by the national legal systems of Member States and is not standardised at EU level. The obligations imposed by EU law are that any such procedure respects the principle of equivalence and that they provide effective judicial protection. The standard for determining whether a procedure provides effective judicial protection is to assess whether the national procedure makes the application of EU law excessively difficult or impossible.

The CJEU recalled earlier case law which held that the realisation of the rights guaranteed by Directive 93/13 could not be ensured without a judge’s ability to review the terms of a consumer contract to determine whether the terms fall within the definition of “unfair” in the Directive. The Court noted that it had been established that the fundamental disparity between consumer and seller/supplier can only be remedied by intervention from outside the parties if the protection contained in the Directive is to be guaranteed.

The Court also noted that it was well settled that where national courts have the legal and factual evidence required to verify the fairness of a consumer contract, they are obliged to carry out an assessment of the contractual terms. The Court reasoned that effective judicial protection could not be guaranteed if national courts were prevented from scrutinising the contractual terms underpinning disputes between consumer and seller/suppliers.

The CJEU ruled that when a national court determines that domestic measures prevent it from taking investigative steps to determine the fairness of the terms in a consumer contract, the domestic Court must assess whether an interpretation consistent with EU law could be realised through any statutory exceptions in the domestic measure, such as that contained in Article 399(2) of "reasonable doubt". Where not possible to interpret national measures in accordance with the obligations imposed by Directive 93/13, the CJEU held that national courts are required to disapply those national measures and carry out a review of the terms of the consumer contract to determine whether they might be unfair.

Implications of the Decision in Ireland

When papers are filed in court for Summary Judgement, does a Judge have the opportunity to review the contract terms? Does the judiciary actually scrutinise the contract for unfair terms?

If the answer to either of these questions is “No” then Ireland is in breach of its obligations to implement the Directive.

Where Summary Judgement is sought “in the office” it is unclear whether a Judge has the opportunity to inspect the contract terms and thus, whether the Directive is capable of being complied with.
This judgement calls into question whether Irish procedures by which judgements in default are issued in disputes arising from consumer contracts, fall short of the obligations imposed on national courts to scrutinise consumer contracts and the standard of consumer protection envisaged by the Directive.

© 05.07.2023 | Hannah Harte | Robert Browne

How can we help?

Our team of Partners, Solicitors, legal experts and support staff is ready to work on your next project. Let's talk soon...
tags linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram