By George Coucounis
EU law does not preclude the annulment of a loan agreement, including a mortgage loan, in CHF (Swiss francs) if the nature of its main subject matter, due to the removal of unfair terms, is likely to alter in that it would no longer be indexed to a foreign currency while remaining subject to an interest rate based on that currency rate.
The terms of a loan agreement in a foreign currency that the exchange rate between the foreign and the local currency will be taken into consideration both at the time of its disbursement and at the time of payment of each instalment are unfair terms due to the fluctuation of the exchange rate and put the borrower at risk. If the court declares that these terms are unfair and that they do not bind the borrower, the loan agreement is affected to such a degree that it becomes inapplicable and thus invalid.
This important finding was reached by the Court of Justice of the European Union in its judgment on 3.10.2019 concerning a Polish couple who entered into a CHF mortgage agreement. At the time the loan was disbursed, the debt remaining and expressed in CHF was determined on the basis of the buying rate between the local currency and CHF applied by the bank on the day of the disbursement, whereas the monthly repayments were calculated in accordance with the local currency and CHF selling rate applied by that bank at the time they fell due. This exposed the borrowers to an exchange rate risk.
The borrowers instituted an action against the bank claiming a declaration that the loan agreement was invalid due to the unfair terms which were not binding upon them according to the directive on unfair terms in consumer contracts and that the removal of these terms would lead to the annulment of the agreement.
The Polish court referred to the EU Court which held that in certain circumstances, the national court may substitute an unfair term with a provision of national law to restore a balance between the parties to the agreement and maintain the validity of the agreement. In particular, the Polish court asked whether, after their removal, the unfair terms may be replaced by general provisions of Polish law which provide that the effects expressed in an agreement are to be completed by the effects arising from the principles of equity or established customs.
Moreover, it asked whether the directive permits it to annul the agreement where the maintenance of the agreement without the unfair terms would result in altering the nature of its main subject matter, even though the loan at issue would no longer be indexed to CHF, the interest would continue to be calculated on the basis of the rate applicable for that currency.
The court of the European Union held that the said general provisions of Polish law do not apply. Since such an alteration appears to be legally impossible under Polish law, the directive does not preclude the annulment of the agreement in question by the Polish court.
The judgment of the Court of the European Union affects many cases pending before the Cyprus courts regarding claims instituted by banks against borrowers in CHF. It is up to the borrower, in his capacity as a claimant in an action filed by him against a credit institution or as a defendant in an action filed against him by a credit institution to allege that specific terms of the loan agreement are unfair. When raising such an issue, the borrower has to list these terms in his pleadings and request from the court to declare them unfair, non-binding and affecting the validity of the loan agreement to such an extent that they render it unenforceable and consequently invalid. Despite this, the national court may examine whether a term is unfair.
George Coucounis is a lawyer practicing in Larnaca and founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]