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Part I General Part, 1 Introduction

Danny Busch, Matthias Lehmann

From: Unfair Terms in Banking and Financial Contracts

Edited By: Danny Busch, Matthias Lehmann

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.date: 18 April 2024

Subject(s):
Banker-customer contract — Capital markets — Currency

(p. 3) Introduction

General

The control of standard terms and conditions is one of the sharpest weapons of modern contract law. In contrast to other legal instruments, it directly interferes with the content of the contractual obligation. This is achieved by prescribing particular conditions for the validity and rules for the interpretation of contractual stipulations that have not been negotiated by the parties but preformulated by one of them and merely accepted by the other, the so-called ‘standard terms’ or ‘general terms’. Controlling these terms for their fairness serves to remedy an asymmetry of information and bargaining power between the contractual partners. Besides its direct microeconomic effect, this control has also macroeconomic relevance, because it sets the boundaries in which contractual freedom and the market principle can operate.

II  Banking and Financial Contracts

There is a particular need for unfair terms control in banking and financial contracts, where typically less informed and rationally apathetic customers face professional repeat players with exponentially superior economic heft and expertise. The customers rarely ever read standard terms submitted by the latter to them, and if they do, rarely understand them.

Even if they read and understand the standard terms, their economic position does not allow them to change an individual term through negotiation. They may try to walk away only to find that a different bank offers the same conditions, perhaps because it is part of the same bank group or association.

The customer’s lack of influence over standard terms in banking and financial contracts is especially problematic because these contracts are typical ‘legal products’: they do not (p. 4) consist in the provision of some tangible good or service, but in the collection of contractual terms that constitute their essence.

The judicially administered control of these terms can re-establish a balance of power between the financial industry and its customers, and also shapes the landscape for financial services.

III  The Unfair Terms Directive

In the European Union (EU), the preeminent tool for unfair terms control is Directive 93/13/EEC (‘Unfair Terms Directive’ or UTD).1 Initially conceived as an instrument for the opening of markets, it has become much more than that: it is a symbol of the typical European strife for balancing freedom of contract with the demands of social justice. For more than twenty-five years, the UTD has been applied by civil courts of the Member States and other relevant actors, such as alternative dispute resolution (ADR) authorities, to a wide range of issues. The Directive covers virtually all agreements between businesses and consumers, including banking and financial contracts.

Recently, the Directive’s application in this field has become the subject of fierce controversy. Increasingly, the fairness or unfairness of contractual terms issued by banks and other financial intermediaries is a focal point of domestic litigation, as evidenced by the numerous questions on the Directive’s interpretation submitted by national courts to the Court of Justice of the European Union (CJEU). These concern highly contested questions with tremendous political, social, and economic implications.

Examples include the validity of currency clauses in mortgage loans or of variable interest rate or floor clauses, which have vastly increased individual indebtedness in a number of Member States and led to evictions and homelessness. The preliminary rulings by the CJEU have demonstrated the court’s willingness to use the UTD as a tool of legal and social engineering. Its goal is to obtain fairness while maintaining a competitive environment for banks and other financial service providers.

Nevertheless, the references have also sparked an often feverish interaction between the CJEU and the national courts, which has revealed widespread uncertainty and misunderstandings about the role and meaning of the UTD, its relation to general contract law, and the consequences in the particular circumstances of individual Member States. The CJEU has not achieved its goal of clarifying the meaning of the Directive. Its decisions often seem contradictory and are difficult to understand without the context of the national legal systems from which they arose.

Yet the number of questions being submitted to the CJEU is not the only problem relating to the UTD. Many other cases in which the Directive applies to banking and financial contracts never reach the highest European level, but are dealt with exclusively at the national level. And naturally there is little information about those issues that go beyond the Directive, for instance the control of standard terms in business-to-business (B2B) contracts.

(p. 5) IV  The Purpose and Scope of this Book

This book gives an overview of unfair terms control in the area of banking and finance. The term ‘banking and financial contracts’ is very wide. We consciously abstained from imposing any precise definition of the term so that the national reporters would not be constrained in presenting issues that are relevant in their jurisdiction. We understand the term broadly as any agreement to which at least one credit institution or other financial institution, such as a broker, payment service provider, or insurance company, is a party. This leads to a wide coverage that includes a variety of different contracts, such as account agreements, payment transfer orders, insurance contracts, and contracts for the investment of funds. In all of them, standard terms are both very important and raise difficult problems. We do not limit the analysis to consumer contracts, but include B2B contracts as well insofar as they are subject to unfair terms control under national law.

Our area of investigation is Europe in a wide sense. Therefore, we include not only the EU, but also the European Economic Area (EEA). Yet we also go further and study the legal systems of two European countries outside the EEA with an important financial sector, namely Switzerland and the United Kingdom. Although the UTD does not formally apply in those countries, it has certain ripple effects on them. In our selection of the jurisdictions studied, we had to make some decisions in light of the high number of European countries. Our choice has been guided by the demand of geographical diversity, the economic importance of the countries analysed, and whether or not they present interesting applications of unfair terms control. We would love to learn more about other countries that we could not cover and we hope that this book will not be an end point but rather a source of inspiration for more comparative studies of the issues presented here.

Structure of this Book

Our starting point is the EU and its seminal text, the UTD. To this end, we will study the Directive itself and its interpretation by the CJEU (Part I Chapter 2). We will then delve into the national reports. First, we will study the interpretation and application of the Directive and unfair terms control beyond the Directive’s requirements in fifteen selected EU Member States ordered according to the size of their population (Germany, France, Italy, Spain, Poland, Romania, the Netherlands, Belgium, Greece, the Czech Republic, Sweden, Hungary, Austria, Ireland and Estonia) (Part II). We will then extend our analysis to a non-EU Member State that is part of the EEA, namely Norway (Part II a). Afterwards, we leave the EU and the EEA to address the laws of other European countries, namely the United Kingdom and Switzerland (Part II b). We will conclude by weighing the options for the further development of the control of standard terms in banking and financial contracts in Europe (Part III).

VI  Acknowledgements

Many of the contributions in this book have been presented at a joint conference of the University of Vienna and Radboud University Nijmegen, which took place on 14 and 15 (p. 6) October 2021 in Vienna. We would like to thank both universities for their generous support. We owe a debt of gratitude to the authors who have contributed to this book. Finally, we would like to thank our team, in particular Paul Eichmüller, Amy Held, Felix Krysa, Vanessa Kasper, Emeric Prévost, Fabian Schinerl, Jonas Schürger, Robert Vogelauer, and Verena Wodniansky-Wildenfeld (all Vienna), as well as Tijmen de Grutter, Rens Kattenbelt, Sophie Bolhuis, and Dawit Agoub (all Nijmegen), for their support during the conference and the completion of this book.

Footnotes:

1  Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L 95/29.