In its ruling of 30 April 2014 in Case C-26/13, the Court of Justice of the European Union addressed the possible unfairness of the terms of loan agreements denominated in a foreign currency, under which the exchange rate used for the calculation of the amount of the loan differs from that used for loan repayments.

In the case before the Court of Justice, consumers in Hungary concluded a contract for a mortgage denominated in a foreign currency with a bank. The consumers received a loan of 14,400,000 Hungarian forints (HUF), and it was agreed that the amount of the loan would be calculated based on the buying exchange rate of that currency applied by the bank on the day the bank released the funds. The loan, interest, loan administration fee and other fees were also to be denominated in this foreign currency following the release of funds. Based on the buying exchange rate of the Swiss franc (CHF) applied by the bank on the release of funds, the amount of the loan was fixed at CHF 94,240.84. The borrowers-consumers were expected to repay this sum in monthly instalments over 25 years. Under the contract, the bank was to determine each monthly instalment in Hungarian forints, based on the selling exchange rate of the Swiss franc applied by the bank on the day before the due date of the instalment.

For clarity, here is an example of the above model under Czech conditions. A consumer takes out a loan of CZK 10,000,000, which is to be denominated in Euros. The buying exchange rate of the Euro on the day of the release of funds is CZK 27, whereby the amount of the loan is fixed at EUR 370,370.37.

However, each monthly instalment will subsequently be converted at the selling exchange rate, which is less favourable for the consumer than the buying rate. For example, if the consumer wished to pay back the entire loan on the day it was provided, the instalment would be converted at the selling exchange rate of the Euro, which was CZK 28, and the consumer would thus pay back CZK 10,370,370.36, not including interest and other fees.

In the case before the Court of Justice, the consumers therefore brought an action against the bank, in which they challenged the fairness of the relevant terms. They claimed that, in so far as these terms allowed the bank to determine monthly instalments based on the selling exchange rate of the foreign currency, while the amount of the loan was calculated using the buying exchange rate, this gave the bank a unilateral and unjust advantage.

Both the Hungarian court of first instance and the court of appeal ruled in the consumers’ favour. The Supreme Court (Kúria) then brought the case before the Court of Justice of the European Union to weigh preliminary questions on whether it was even possible to judge these terms of the loan agreement as unfair.

The Court of Justice considered the case in terms of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. The Directive states that consumers are not bound by unfair terms in contracts concluded with a seller of goods or provider of services. However, assessment of unfairness does not apply to terms defining (i) the main subject matter of the contract or (ii) the adequacy of the price and remuneration on the one hand, as against the services or goods supplied in exchange on the other, provided these terms are written in plain, intelligible language.

The Court of Justice therefore examined two issues:

1)      Whether the terms in question were terms defining the main subject matter of the contract or the adequacy of the price and remuneration on the one hand, as against the services or goods supplied in exchange on the other,

2)      Whether the terms were written in plain, intelligible language.

The Court of Justice came to the conclusion that these were not terms defining the adequacy of the price and remuneration on the one hand, as against the services or goods supplied in exchange on the other. In terms of the definition of the main subject matter of the contract, the court stated that the prohibition on determining the unfairness of terms relating to the main subject matter of the contract had to be interpreted restrictively and could only be applied to terms laying down the principal obligations of the contract, which characterised it as such. It is for the national courts to determine whether or not the contested terms constitute such an element of the contract.

If the national court were to conclude that the terms defined the main subject matter of the contract, the assessment of their unfairness would only be precluded if they were written in plain, intelligible language. In this context, the Court of Justice emphasised that this requirement was not limited to clarity and comprehensibility from a formal and purely grammatical aspect, but that the loan agreement must also transparently indicate the reason and manner in which foreign currency is converted. It is thus for the national court to determine whether, based on advertising and information provided by the bank during the negotiation of the loan agreement, a reasonably well-informed, reasonably observant and circumspect consumer could not only have learned there was a difference between the buying and selling exchange rate of the foreign currency, but also judge what impact the use of the selling exchange rate would have on determining loan instalments and the total costs of the loan.

Based on the above findings by the Court of Justice, it can therefore be concluded that the terms in question will probably be interpreted by the national courts as terms governing the main subject matter of the contract, as they govern the consumers’ obligation to repay the loan and pay interest and other fees.

To assess the unfairness of these terms, it will be crucial to assess whether the consumer was duly acquainted with the difference between the selling and buying exchange rate of the foreign currency before concluding the contract, and whether they could have properly judged the consequences of using the different exchange rates for the provision of the loan and its repayment. If the consumer did not receive this information, it is highly probable that the court will consider such terms to be unfair, and in extreme cases may declare the entire loan agreement as invalid.

Therefore, if a lender is considering the provision of a loan denominated in a foreign currency and intends to use different exchange rates to determine the amount of the loan and its repayment, it should pay special attention to communication with the consumer, so that it can demonstrably show the consumer was clearly and comprehensibly informed of the implications that the use of the different exchange rates would have for the consumer’s loan. This can be achieved by providing written information that is signed by the consumer or information over the phone captured on a recording.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.