Borrowers’ right to compensation from banks for unfair loan terms confirmed by the CJEU

In its preliminary ruling delivered on 15 June 2023 in the case of Arkadiusz Szcześniak (“A.S.”) v. Bank M. SA (the “Bank”) (C-520/21), the Court of Justice of the European Union (the “CJEU”) concluded that consumers can demand compensation from banks beyond the reimbursement of monthly instalments paid by them, where the loan agreement with unfair terms is declared null and invalid.

Background to the case brought before the Polish District Court

Back in 2008, A.S. and his wife concluded a 28-year mortgage loan agreement with Bank M., the terms of which were not individually negotiated. The mortgage loan agreement was FX-denominated, as the customers paid the monthly instalments in Polish Zlotys after conversion thereof using the Swiss Franc’s selling rate.

By an action instituted before the Polish District Court in Warsaw, A.S. sued the Bank in pursuit of compensation since the mortgage loan agreement contained unfair terms rendering such agreement invalid. He contended that the Bank had received the monthly loan instalments without a legal basis due to this. Notably, this case was one of a number of such cases instituted before Polish courts, most of which successfully claimed that conversion clauses in loan agreements are unlawful due to these being deemed as unfair terms.

In this particular case, however, A.S. did not only claim from the Bank repayment of the monthly instalments that he had paid to the Bank within the relevant period, but he also claimed the financial profit made by the Bank during this period. The Bank responded by claiming that the agreement did not contain unfair terms and that, in any event, if the agreement was to be annulled, it would the Bank which should claim payment of the debt rather than the borrower.

The Polish District Court concluded that the relevant clause in the mortgage loan agreement does in fact render such agreement null as if it had never been concluded. The Court considered this issue in the context of Directive 93/13/EEC (the “Unfair Terms Directive”), which lays out consumer protection measures to be imposed by Member States in such scenarios. The Court was however faced with the question as to whether A.S., as a party to the invalid loan agreement, may claim, in addition to repayment of the monthly instalments, payment of other amounts on the basis that the funds were used by the Bank without any legal basis to make its own financial gain.

Questions referred to the CJEU

Given that the above-mentioned issue was never considered at EU level, the Polish District Court’s referred the following question for a preliminary ruling:

  • Whether Article 6(1) and Article 7(1) of the Unfair Terms Directive prevent a consumer who is a party to a loan agreement with a bank that is found to be null due to unfair clauses from pursuing other claims in addition to the reimbursement of the sums paid in the performance of that agreement on the basis that:
  1. the customer was temporarily deprived of the use of his or her money, so that they lost the opportunity to invest it and thus to make a profit;
  2. the customer incurred the costs of servicing the loan agreement and of transferring the money to the other party;
  3. the Bank had the benefit of being able to temporarily use someone else’s money, including being able to invest it and thus make a profit;
  4. the purchasing power of the money has decreased with time, which translates to a loss in real terms for the person making the monetary consideration.

The CJEU’s considerations

Primarily, the CJEU noted that the Unfair Terms Directive is based on the premise that the consumer is always in a weaker position vis-à-vis the seller. This often leads to the consumer agreeing to terms drawn up in advance by the seller and having no ability to negotiate the agreement. This is the basis for the Unfair Terms Directive’s requirement on Member State to establish what constitutes unfair terms within their jurisdictions. The CJEU noted that it is up to the national courts to determine whether specific clauses in agreements are unfair so that these do not produce binding effects on the consumer. Nevertheless, the CJEU contended that if a contract is deemed to include unfair terms, then Member States must allow the restoration of the legal and factual situation that the consumer would have been in if such unfair terms had not been included in the first place. The CJEU noted that this may be achieved by, for example, creating a right of the customer to the restitution of advantages that the seller obtained illegally, on the basis of the unfair terms, to the customer’s detriment.

In addressing the questions posed to it, the CJEU recognised that the Unfair Terms Directive does not expressly provide for the consequences of the invalidity of a contract concluded between a seller and a consumer vitiated by unfair terms. This is therefore an issue to be addressed by national rules of Member States. In this regard, the CJEU stated that national rules on the consequences of the invalidity of a mortgage loan agreement as the one in question should make it possible to restore the situation which the consumer would have been in if there were no unfair terms within the contract. National rules should also not undermine the aim of the Directive, which is to deter sellers from placing consumers at a disadvantage in an unfair manner.

Ruling of the CJEU

Applying the above to the case at hand, the CJEU noted that there are no grounds to believe that A.S.’ right to claim from the Bank payment of sums which go beyond the reimbursement of monthly repayments undermines the deterrent effect objectives of the Unfair Terms Directive. It would therefore be for the Polish District Court to examine whether the relevant national rules would allow A.S. to restore his position (financially and otherwise) to the one he was in prior to the mortgage loan agreement being entered into.

The possibility for a consumer to seek such claims going over and above the repayment of the monthly instalments was identified by the CJEU to continue to deter sellers or banks in general from including unfair terms in their agreements. The fact that such sellers may face financial consequences going beyond the restitution of the amounts paid by the consumer would further prevent unfair practices in the market. The CJEU also noted that the principle of proportionality must nevertheless be respected as a general EU law principle, in that national law should not be implemented to achieve results beyond those which are necessary.

Addressing the Bank’s counterargument that it should be the one seeking compensation, the CJEU noted that this would put into question the dissuasive effect of the Directive on sellers and banks. If national law were to be interpreted to entitle banks to claim reimbursement from consumers which goes beyond the amounts paid by the consumer, this would undermine the protection offered by the Directive and on the contrary contribute to the possibility of banks retaining such unfair clauses.

The CJEU conclusively reiterated that it cannot be accepted that sellers, or banks, in such case, may circumvent the requirements and intentions of the Unfair Terms Directive and derive financial advantages from their unlawful conduct, or even worse, be compensated for the disadvantages caused by such conduct. In concluding its ruling, the CJEU therefore decided that A.S. was able to seek compensation which goes beyond the reimbursement of the monthly loan repayments, in order to restore his situation prior to the conclusion of the loan agreement that was declared null and void.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.

This article was first published on The Malta Independent on 28/06/2023.