Unfair Contract Terms in Consumer Contracts - Course on Consumer Protection Law in the EU

1. Univ.-Prof. Andreas Schwartze, LL.M. (EUI) Contract Law: Unfair Contract Terms in Consumer Contracts – Course: Consumer Protection Law in the EU (Sveučilište u Zagrebu 10.12.2014)

2. 1. Scope of Application Material Scope I: Contracts • Directive 93/13 to be applied on all kind of contracts (Rec.10: “...; whereas those rules should apply to all contracts …”) -> anyobject (Art.4 I Dir93/13: „goodsorservices“) – even real estatecontracts / transactionsconcerningintellectualproperty -> gratuitoustransactions (eg personal guarantees) • but: only between “sellers or suppliers and consumers” (Rec.10) -> rarely employment or company contracts (no parties as consumers) -> no family or succession contracts (no parties as business) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

3. Introduction Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts • only Directive generally concerning content of contract (others on specific types of contract, eg consumer credit, package tours, time sharing, consumer sales) • based on Art 100a EECT (now: Art 114 TFEU) -> goals: functioning of internal market (and: consumer protection) • legislative history: first drafts 1975/1977; -> DE: AGB-G 1976 / UK: UCTA 1977 / FR: Loi 78-23 1978 consultation paper 1984; first proposal 24.7.1990; amended proposal 4.3.1992 • minimum harmonisation: Art.8 Dir93/13 – option for MS to adopt or retain more stringent provisions in favour of consumer protection Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

4. 1. Scope of Application Material scope II: Consumer contracts • Directive 93/13 to be applied only to B2C-contracts (Rec.10: “... to all contracts betweensellers or suppliers and consumers …”) • Consumer: a “natural person who … is acting [+ primarily]* /[not predominant]** for purposes which are outside [not relatedto]*his[or her]*trade, business[craft]**orprofession“ (Art. 2 lit b Dir93/13) -> usual definition(but compareDCFR Art. I.-1:105 (1)*; CESL Art. 2 lit f **) seeECJ Idealservice C-541/99, C-542/99: noextensionto legal personsandcompanies ECJ Gruber C-464/01: dual use - noconsumerifmorethan marginal businessaspect • Seller / Supplier: any “natural or legal person who … is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned” (Art 2 lit c Dir93/13) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

5. 2. Limitations to Contract Terms Control I. Individually negotiated terms • Fairness control only for non-negotiatedterms(Art.3 (1) Dir93/13) = pre-formulated/ „drafted in advance“ (Art.3 (2) Dir93/13) <-> standard form terms(generallydraftedforseveralcontracts, Art.II.-1:109 DCFR) • compare DCFR Art. II.-9:403: “a term[which has not been individually negotiated]” -> political decision (Intr.79) • compareCESL Art. 83 (1): CommProp/ EP • burdenofprooffor individual negotiationbearstheseller /supplier (Art.3 (2) s.3 Dir93/13 / Art.II.-1:110 (4) DCFR) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

6. 2. Limitations to Contract Terms Control II. Core terms (subject matter or price) • No fairness control forthecoreofthecontract(Art.4 (2) Dir93/13) = subject matter ofthecontract / adequacyoftheprice in exchange -> if in clear and comprehensiblelanguage - Rec.19 Dir93/13: exception, shouldbeinterpreted in a restrictivewayand be limited totheprice/qualityratio(price-relatedtermsundercontrol) egterms on calculationorchangeofprice but see ECJ Caja de Ahorros C-484/08: more stringent national provisions designed to afford a higher level of consumer protection not precluded (Spain) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

7. 2. Limitations to Contract Terms Control III. Mandatory statutory or regulatory provisions • No fairness control if terms are similar to rulessetbythelegislator „The contractualtermswhichreflectmandatorystatutoryorregulatoryprovisions … shall not besubjecttotheprovisionsofthisDirective.“(Art. 1 (2) Dir93/13) - also defaultrules(Rec.13 s 3 Dir93/13) -> these rules areconsideredtobethemostequitableones - Rec.13 s.1 Dir93/13: „… arepresumednot tocontain unfair terms“ Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

8. 3. The Content of Contract Test I. No special regulations on inclusion of terms into the contract • DE: - express reference to non-negotiated terms - reasonablechancetotakenoteofthecontentoftheterms - consentregardingthevalidityoftheterms -> formationofcontract compareArt.II.-4:204 DCFR: acceptance §305 (2) BGB: Standard business terms only become a part of a contract if the user, when entering into the contract, 1.  refers the other party to the contract to them explicitly or, where explicit reference, due to the way in which the contract is entered into, is possible only with disproportionate difficulty, by posting a clearly visible notice at the place where the contract is entered into, and 2.  gives the other party to the contract, in an acceptable manner, which also takes into reasonable account any physical handicap of the other party to the contract that is discernible to the user, the opportunity to take notice of their contents, and if the other party to the contract agrees to their applying. - problem of conflicting standard terms: “strike out”-Rule (Art. II.-4:209 DCFR) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

9. 3. The Content of Contract Test II. No ban for surprising terms • DE: - unusual non-negotiated terms are not included into the contract §305 c (1) BGB: (1)Provisions in standard business terms which in the circumstances, in particular with regard to the outward appearance of the contract, are so unusual that the other party to the contract with the user need not expect to encounter them, do not form part of the contract. -- iftermsareextraordinary in such a contractor -- iftermsareunexpected in thispartof a contract Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

10. 4. The Fairness Test I. Substantive Control – (1) General test • term not “contrary to the requirement ofgoodfaith“ (Art.3 (1) Dir93/13) -> „goodfaith“ as an importantprinciple ofcontinentalsystems, esp DE (§ 242 BGB) -> „good faith“ usedbeforeas a generalcriteriontoassessunfairness (eg PT Art.16 Law1985) takingintoaccount: natureofgoodsandservices / circumstances at conclusionofcontract / othertermsofthecontract(Art. 4 (1) Dir93/13) + guidelinesin thepreamble (Rec.16): “… whereas, in making an assessment of good faith, particular regard shall be had to the strength of the bargaining positions of the parties …” Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

11. 4. The Fairness Test I. Substantive Control – (1) General test • term not causing “a significant imbalance in the parties‘ rights and obligations“ (Art.3 (1) Dir93/13) compared to statutory regulations or contractual practice -> but: national contract law not uniform - significant: not only marginal - unjustified - to the detriment of the consumer (favorable terms allowed) ECJ Freiburger Kommunalbauten C-237/02: specific case has to be assessed by national court Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

12. 4. The Fairness Test I. Substantive Control – (2) Specific clauses • Annex oftheDirective 93/13 with„indicativeand non-exhaustive“ (Art 3 (3)) list -> “grey”: terms may be regarded as unfair -> but without obligation lit a – lit q = 17 terms -> DCFR Art. II.-9:410: same list „presumedtobe unfair“ [but DE: twolists - onegrey / oneblack] only as a non-binding guideline forthefairnesstest ECJ Commission v Sweden C-478/99: Annex must not be an integral partoftheprovisions Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

13. 4. The Fairness Test II. Consequences of unfairness • terms failing the unfairness test are „not (be) binding on the consumer“ (Art.6 Dir93/13) but the rest of the contract is not affected and continues to be binding -> similar DCFR Art. II.-4:408 ECJ Oceano C-240/98: automatically non-binding (without an action of the consumer) ECJ Asbeek/Jahani C-488/11: examination by the national court, of its own motion, as to whether a contractual term is unfair ECJ Banco Espanol-E C-618/10: national court cannot revise the content of that term instead of merely setting aside its application to the consumer Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

14. 4. The Fairness Test III. Formal control • the terms have to be expressed in „plain, intelligible language“ – transparency principle (Art.5 s.1 Dir93/13) and „the interpretation most favourable to the consumer shall prevail“ contra proferentem rule (Art.5 .s.2 Dir93/13) ECJRWE-Vertrieb C-92/11:automatically non-binding (without action of consumer necessary) ECJ Kásler C-26/13: Substitution of the unfair term by a supplementary provision of national law Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

15. 5. Enforcement Individual actions complemented by collective actions • MS are required to introduce „adequate and effective means“ to prevent unfair terms (Art.7 Dir93/13) -> „collective actions“ necessary, but instruments left to MS (eg granting access to the courts to consumer associations, implementing public bodies like the Office of Fair Trading /UK; Ombudsman /SE) ECJPannon C-243/08: automatically non-binding (without an action of the consumer) • criterion: average consumer (objective <-> Art. 4 (1) Dir93/13) Univ.-Prof. Dr. Andreas Schwartze, LL.M. (EUI) - University of Zagreb (10.12.2014)

16. Thank you for your attention!