CJEU issues ruling regarding loans denominated in foreign currency

The information provided by the lender to the consumer concerning the existence of a foreign exchange risk does not satisfy the requirement of transparency if it is based on the assumption that the exchange rate between the account currency and the payment currency will remain stable throughout the term of the agreement

The ruling pertains to a case of consumers who, in 2008 and 2009, took out mortgage loans denominated in Swiss francs and repayable in euros at BNP Paribas Personal Finance, in order to finance property purchase or shares in property companies.

"Due to the characteristics of those loans, their conclusion entailed a foreign exchange risk linked to the variations in the course of the euro against that of the CHF. Even though the existence of that risk was not mentioned explicitly in the loan agreements, it nevertheless followed indirectly therefrom that that risk was inherent and was borne by the consumer" - the CJEU said in a statement.

This led to a situation in which the consumers had troubles paying their monthly installments, and as a result "legal proceedings were initiated before the tribunal d’instance de Lagny-sur-Marne (District Court, Lagny-sur-Marne, France) and the tribunal de grande instance de Paris (Regional Court, Paris, France), respectively."

"Those courts are to determine whether the terms of the abovementioned agreements, having exposed the consumers to an uncapped foreign exchange risk, must, in the light of the Directive on unfair terms in consumer contracts, 1 be regarded as unfair and, accordingly, as not binding on the borrowers."

In that regard, the District Court, Lagny-sur-Marne, and the Regional Court, Paris, referred to the Court of Justice a series of questions on the interpretation of the directive.

The statement listed four main points to justify its verdict.

"In the first place, the Court recalls that unfair terms in a consumer contract are not binding on the consumer and must be regarded as never having existed, so as not to have any effects on the consumer’s legal and factual situation. Consequently, the Court takes the view that a claim brought by a consumer in order to obtain a declaration that a term in such a contract is unfair cannot be subject to any limitation period" - we read.

"That said, the Court points out that the directive does not preclude national legislation which subjects the action to enforce the restitutory effects of that finding to a limitation period."

The CJEU stated, however, "that a limitation period for repayment of sums paid on the basis of an unfair term which is likely to have expired even before the consumer becomes aware of the unfair nature of that term cannot be compatible with the directive".

"In the second place, the Court finds that it is for the referring courts to assess whether the terms at issue lay down an essential element characterising the loan agreements at issue and constitute the main subject matter thereof. In such a case, under that directive the unfairness of those terms may be assessed only if the terms were not drafted in plain, intelligible language" - the EU court said.

The third point states "that the requirement of transparency is not satisfied by the seller or supplier communicating to the consumer, upon conclusion of the agreement, information – even a large amount of information – if that information is based on the assumption that the exchange rate between the account currency and the payment currency will remain stable throughout the term of the agreement. That is the case, in particular, where the consumer has not been informed by the seller or supplier of the economic context liable to have an impact on exchange rate variations".

"In the fourth place, in the light of the seller or supplier’s knowledge of the foreseeable economic context capable of having an impact on exchange rate variations, of that professional’s greater means to foresee the foreign exchange risk and of the significant risk relating to foreign exchange variations that the terms at issue place on the consumer, the Court is of the opinion that those terms may give rise to a significant imbalance in the parties’ rights and obligations arising under the loan agreement, to the detriment of the consumer" - the statement reads

"In so far as the seller or supplier has failed to comply with the requirement of transparency with regard to the consumer, those terms seem to place on that consumer a risk which is disproportionate in relation to the services provided and the amount of the loan received, since the effect of applying those terms is that the consumer must ultimately bear the cost of changes in the exchange rate" - the court concluded.