The judgment issued by the European Court of Justice (ECJ) on September 20, 2017 indicates the outcome of cases pending before the Cyprus courts regarding disputes between borrowers and banks in relation to loan agreements in foreign currency. The issue was examined in the framework a Directive for the protection of consumers from unfair terms in agreements which were concluded mainly in Swiss Francs (CHF). The exchange risk borne entirely by the borrower creates significant imbalance in the parties’ rights and obligations arising under the contract. The time at which the imbalance must be assessed is the time the agreement was concluded; the scope of the terms must be drafted in plain intelligible language so the borrower is warned of potential risks, especially with regard to exchange rates. The increase in the price of CHF in connection with the repayment of the loan creates a duty on the bank to inform and advise the borrower about a possible future increase or decrease in the exchange rate and therefore loan payments.
In the aforesaid judgment, the Court of Appeal of Oradea in Romania submitted to the ECJ three preliminary questions concerning 69 borrowers who obtained loans in CHF. The dispute in the main trial arose due to their obligation deriving from the loan agreement to repay the loan in the same foreign currency. The increase in the exchange rate of the CHF with the local currency put the borrowers in a very difficult position. Article 1 of Directive 93/13 approximates the laws, regulations and administrative provisions of member states relating to unfair terms in contracts concluded between a seller or supplier and a consumer. A contractual term which has not been individually negotiated will be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. It also provides that the unfairness of a contractual term shall be assessed, considering the nature of the goods or services for which the contract was concluded. Assessment of the unfair nature of the terms, according to the Directive, depends on whether all or certain terms offered to the consumer which are in writing, were drafted in plain, intelligible language.
The ECJ decided that article 3.1 of the Directive must be interpreted as meaning that the assessment of the unfairness of a contractual term must be made by reference to the time of conclusion of the contract, taking account all of the circumstances which could have been known to the bank at that time, and could affect the future performance of that contract. The ECJ also decided that article 4.2 must be interpreted as meaning that the requirement that a contractual term must be drafted in plain intelligible language requires that, in the case of loan agreements, financial institutions must provide borrowers with sufficient information to enable them to take prudent and well-informed decisions. In that connection, the requirement means that a term under which the loan must be repaid in the same foreign currency as that in which it was contracted must be understood by the consumer both at the formal and grammatical level, and also in terms of its actual effects, so that the average consumer would be aware both of the possibility of a rise or fall in the value of the currency, and would also be able to assess the potentially significant economic consequences of such a term with regard to his financial obligations.
George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca, Tel: 24 818288, [email protected], www.coucounislaw.com