Unfair Contract Terms Directive | Fairness of term containing possibility of creating a significant imbalance

When should the fairness of a term be assessed in a consumer contract?

The key takeaway

When considering whether a term is “unfair” for the purposes of Unfair Contract Terms Directive (Directive), the courts should ascertain whether, as at the date on which the contract was concluded, the contract terms gave rise to a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer. The fairness assessment cannot depend on subsequent events that are beyond the parties’ control.

The background 

The Directive, which was implemented in the UK by the Consumer Rights Act 2015, provides that, where a contractual term has not been individually negotiated, the court will consider it to be unfair if it is found to cause a significant imbalance in the parties’ rights and/or obligations under the contract, to the detriment of the consumer, and contrary to good faith.

In this case, separate share leasing agreements were entered into between Dutch consumers XXX and Z (Consumers) and a bank (the predecessor in title of Dexia Nederland BV (Dexia)). Under the agreements, the Consumers were permitted to borrow a sum of money for a fixed period and the bank would use this sum to acquire shares on behalf of, and for the benefit of, the Consumers. The bank remained the owner of those shares until repayment of the sum borrowed, with any dividends paid to the Consumers.

The agreements included a mechanism to calculate the amounts payable by the Consumers if the bank terminated early for default. Depending on certain factors, including the termination date and interest rates, the bank potentially obtained significant benefit from early termination.

 In 2005/2006, Dexia terminated the leasing agreements with XXX and Z for late payment and drew up final statements, using the contractual mechanism and accounting for delays to monthly payments. The Consumers refused to settle the balances.

 The Court of Justice of the EU (CJEU) was asked to consider whether the contractual terms were compatible with the Directive, drawing attention to Dexia’s significant advantage in the event of an early termination. In particular:

• should the Directive regard a term as unfair where it was a conceivable

  possibility, as opposed to a certainty, that it would cause a significant imbalance?

• can the user deriving the benefit of a now void unfair term claim legal compensation under supplementary national law as an alternative method of recovery?

The decision

 On the first question, the CJEU found that such an imbalanced term in a risk-weighted consumer contract must be regarded as unfair, even where the imbalance only arose under a specific set of circumstances and where, in different circumstances, it operated to benefit the consumer. The fact that there was only a possibility of a significant imbalance did not alter that position.

The CJEU also noted that a contract should transparently set out (i) the specifics of the mechanism in question, and (ii) where appropriate, the relationship between the mechanism and other contractual term, to allow the consumer to evaluate, based on clear, intelligible criteria, the economic consequences of the contract on them.

On question two, the CJEU held that, if a term is void, it should not then revise the problematic term to give it new effect and allow for compensation where the contract is capable of surviving without the term.

That would undermine the objective of the Directive.

Why is this important? 

The possibility that a contractual term could cause significant imbalance in the parties’ rights to the detriment of the consumer was enough for it to be considered “unfair” under the Directive – even where the term might benefit the customer in different circumstances.

Any practical tips? 

Consider all of the potential consequences of terms in standard form, consumer facing agreements, and avoid those terms in the non-exhaustive list in the Annex to the Directive which may be regard as unfair (eg inappropriately limiting legal rights, disproportionate compensation, unilaterally altering/determining terms, etc).