25 Sep 2017

New Hope for Troubled CHF Borrowers?

On September 20, 2017 the Court of Justice of the European Union (the “CJEU“) issued so far the most significant judgment concerning the loans denominated in Swiss francs (the “CHF”). Namely, by judgment in case C-186/16 (Ruxanda Paula Andriciuc and Others v. Banca Românească SA), the CJEU ruled that a financial institution which grants a loan denominated in a foreign currency is liable to provide the borrower with sufficient information, in order to enable him to make a thorough assessment of economic risks and consequences of entering into such contract, and to make a prudent decision on this issue.

The problem of contractual clauses that established the liability of borrowers all across Europe to repay their debts in CHF—after which the amount of their liabilities drastically increased, due to the change of CHF’s exchange rate—in addition to domestic courts, has long been before the CJEU as well. Thus, the judgment in case C-186/16 is not the first one this court issued about the compatibility of subject clauses with requirements from the Directive 93/13/EEC on unfair terms in consumer contracts (the “Directive“). For example, CJEU’s judgment in case C-26/13 (Árpád Kásler and Hajnalka Káslerné Rábai v. OTP Jelzálogbank Zrt) states that Directive’s requirement according to which a contractual term must be clear and understandable implies not only that it must be grammatically understandable, but also that it must provide consumer with precise criteria for assessing its economic consequences.

Judgment C-186/16 was issued on the request of the Appellate Court in Oradea (Romania) for a preliminary ruling, in which the Romanian court asked several questions regarding the scope of banks’ obligation to inform clients about the exchange rate risk in foreign currency loans, from the perspective of the Directive. The essence of the subject problem consists of the following dilemmas: (i) when assessing the existence of significant disproportion in rights and obligations of contracting parties, whether in addition to circumstances that existed at the time of entering into the contract, the event that consumer’s obligation significantly increased after the conclusion of the contract (due to major exchange rate’s changes) has to be taken into account as well; and (ii) whether the requirement that contractual term must be clear, in particular the one according to which foreign currency loan must be repaid in the same currency, implies that the subject term must also present its possible consequences, due to which the amount of consumer’s obligation may vary (e.g. due to exchange rate risk).

The subject judgment very thoroughly explains the CJEU’s opinion that the liability to repay the loan in a particular currency is an essential element of the loan agreement, so the term stipulating such liability must be clear and understandable, so enables a borrower to estimate the total cost of his loan. In other words, the disputed clauses must point out to an average consumer that there is a risk of growth/fall in the foreign currency’s exchange rate, and the impact of the aforementioned to the amount of his liability.

In addition, the CJEU took the view that, when determining the existence of an uneven position of contracting parties, the circumstance whether a bank, at the moment of entering into the contract, had certain knowledge on the facts that could affect the performance of contractual obligations has to be taken into account as well.

In this way—having in mind that the judgment issued on the Romanian court’s request also obliges national courts of other EU Member States when a similar issue is raised before them—the CJEU has created a very wide space for examining clauses which established the liability to repay the loans in CHF. Namely, as a result of the subject judgment, if it is determined that a bank did not inform its client about possible risks, but emphasized only the advantages when entering into the contract, the subject term may be declared unfair, and consequently null, i.e. without legal effect.

Since Serbia is not yet a member of the EU, CJEU’s decisions are currently not enforced in domestic courts. Therefore, CHF borrowers in Serbia (as well as borrowers of loans in other currencies), presently have only a hope that our courts will also align with the above-mentioned interpretation regarding inadequate information provided to potential borrowers. Namely, the Serbian Act on Consumers Protection also contains concepts of unfair and misleading commercial practice, which entails the corresponding negative consequences for the “trader”.

Autors: Nikola Aksic and Lara Maksimovic, Gecic Law