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In a recent high profile case (C-260/18) adjudicated by the first instance court of Warsaw, Poland, a preliminary question was forwarded to the European Court of Justice on the 03/10/2019 to decide on a number of questions regarding the effect of abusive consumer clauses inserted in a mortgage loan, specifically with reference to the issuing of a loan in Swiss Francs (CHF) currency and released in national (PLN) currency.

The question concerned the fate of such a consumer clause, whether it could be enforceable and if not whether abolition could grant the right to a National court to insert provisions from national (domestic) applicable legislation to fill in the gaps and protect the contract as well as the consumer. The matter of interest rate also became relevant to this question as the interest imposed originally was the one based on the reference point of LIBOR CHF 3M and the usual marginal profit of the lending bank.

The applicants alleged that the bank having a financial dominant position, contractually imposed itself without prior negotiation and/or common consensus between the parties (as per Polish national legislation, art. 56 of civil code)  and/or without providing adequate information to the consumer regarding the exchange risks involved in foreign exchange loans and as a result abused the process and induced the consumer into an unfair contractual relationship, only to prove detrimental to the consumer upon the denomination of the foreign currency later on, which in turn meant the increase of the consumer’s overall debt exposure.

The foreign exchange risk was basically the fact that the consumer purchased a loan at a given rate in CHF currency which at the time of purchasing the loan was favorable comparing to PLN as in our case or generally next to the Euro but later on, and upon the CHF’s denomination the loan that was payable at the national currency i.e in PLN (at the official exchange rate that corresponded to each monthly installment that became due and payable) would become more expensive to pay off, due to that currency’s exchange rate denomination , a fact that could not be well understood by a non-sophisticated consumer at the time of entering the contract especially in the absence of sufficient information being provided by the bank prior to entering the loan contract, including the provision of hypothetical examples of such a possible currency denomination that could materially demonstrate the potential risks involved.

Article 6 and 7 of EU Directive 93/13 dictates that such abusive clauses, provided that the relevant clauses of national legislation are well founded, do not bind the consumer whereas the contract (mortgage loan) will remain enforceable and binding to the parties if it can remain in force without the inclusion of such abusive clauses and/or by the replacement of such abusive terms with national legislation in order to protect the consumer. In this sense it was decided that a foreign exchange loan agreement can be converted into the currency of the consumer’s known currency and thus the currency applicable in his country i.e in PLN in order to protect the consumer from future foreign currency fluctuations and further denominations next to the payment currency which would in turn increase the consumer’s exposure.

The referring court took note that in the absence of these abusive clauses the exchange risk would be eliminated as there would be no need to define the actual exchange rate and/or the applicable interest rate (especially when taking into consideration that the latter could not be defined in the absence of the former). In such an event and where the contract could become null and void with the abolition of such abusive clauses that the consumer did not consent to be preserved and ultimately to the detriment of the consumer, the gap created must be filled in with (favorable to the consumer) applicable provisions of national legislation in order to safeguard the validity, continuity and enforceability of the contract.

In a nutshell this case demonstrates that consumer loans which include abusive clauses with reference to risks entailed in the exchange rate between the lending currency and the currency chosen for installment payment purposes, will be replaced with favorable to the consumer national legislation in order to preserve the validity of the contract where these clauses were unfairly and unilaterally imposed to the consumer and without his previous consent and adequate acknowledgment.

The news is welcoming and to be taken as a grand victory to the consumers. The critical question that remains to be answered though is at what cost will the conversion take place? At what rate will the mortgage loans be converted into national currency? Will it be the selling rate at the time of the conversion which in terms implies that the consumer will have absorbed the currency’s denominated value up to the date of the conversion and therefore remain exposed to a higher outstanding debt?  Or will the national courts use national legislation to impose the conversion of the foreign exchange currency at the initial buying rate (retroactive effect) which was still favorable to the consumer when first entering the contract and therefore reduce dramatically the consumer’s debt exposure to date of the conversion? Finally and should the latter be the case, will the paid installments be calculated [upon conversion] based on the initial buying rate retroactively in order to also calculate the current outstanding balance of the consumer or will the installments paid be calculated proportionately on the given exchange rate that existed at the date the installments became due, thus to the consumer’s detriment? On the same token how will the interest margin be calculated? Will it be the current interest margin applicable to PLN mortgage loans (or as the case may be) at the date of the conversion or will it be calculated with a retroactive effect also for the purpose of recalculating paid and/or overdue installments?

These concerns in my opinion will also have to be addressed in the form of preliminary questions to the ECJ for the national courts to obtain sufficient guidelines and directions when implementing national legislation and replacing unfair and abusive consumer clauses in mortgage loan contracts.

The views and expressions of this article form the opinion of its author, Mr. Paris Hadjipanayis and are not to be duplicated or used in formal proceedings without his prior written consent. For more information please contact Mr. Hadjipanayis at [email protected]

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