Analysis: The Transparency Principle in the Interpretation of the UCTD

 

The following analysis delves into the relevance of the transparency principle in the interpretation of the Unfair Contract Terms Directive (UCTD)[1]. Importantly, the scope of application of the directive is broadened by the integration of this principle into its text. Whereas Article 4(2) exempts terms that “define the main subject matter of the contract or the adequacy of the price and remuneration for the goods/services from a determination of unfairness”, it does so under the premise that these are laid out in “plain, intelligible language”. The CJEU has further clarified this point, providing examples of non-transparent terms, such as unilateral price increase clauses and incomplete or false information. Moreover, to properly read the UCTD in the light of transparency, it is crucial to assess the vulnerability of consumers when entering into a contract with a substantially more informed lender.

Both Articles 4(2) and 5 of the UCTD refer to the requirement that written terms must be laid out in “plain, intelligible language”. Moreover, the directive’s preamble includes an obligation to provide and clarify to the consumer the standard terms of the contract[2].

Even though the breach of the transparency principle is not in itself regulated in the Directive, transparency – including whether the consumer has had the opportunity to read the terms before the contract is signed –is interpreted as an element in the assessment on whether or not a term is unfair within the meaning of Article 3, paragraph 1, of the Directive[3]. This has been the reasoning of the CJEU in the cases Invitel, RWE, Kasler, Van Hove and Matei[4].

 

Unilateral price increase clauses

 

The CJEU has interpreted the notion of “plain, intelligible language” beyond vocabulary and grammatical accuracy. A term is clear and intelligible when it allows the consumer to foresee the economic consequences, which derive from a given term[5]. The CJEU has further expanded on this notion in Gutierrez Naranjo, holding that the requirement of transparency “must be construed as involving not only formal but also substantive compliance (…) relating to the adequacy of the information given to consumers at the time the contract is concluded as to the legal and financial consequences for them of the application of the terms relating, in particular, to the main subject-matter of the contract.[6]

The cases Invitel and RWE both dealt with unilateral price increase clauses. Invitel related to a fixed-line telephone network operator that included in its standard contract terms a condition requiring consumers to pay additional fees, which had not initially been agreed between the parties, when the subscribers wanted to pay the invoice charge by money orders. In RWE, a gas supply undertaking reproduced terms set forward in national legislation with individual consumers. According to these terms, gas suppliers could unilaterally alter the gas prices, without stating the grounds, conditions or scope of the variation, as long as consumers were informed of the variation and were free to terminate the contract. The CJEU decided that the power to unilaterally adjust the contract is subject to the constraints laid down by the principles of good faith and transparency, which should be met both at the stage of concluding the contract and during the performance of the contract[7].  The national courts are the ones required to determine whether these requirements have been met[8]. Nonetheless, the CJEU established strict criteria on how to make this assessment. Namely, i) the contract itself must lay down the conditions under which the price may vary and the criteria according to which the change will be calculated; ii) consumers have a right to terminate the contract after having been informed that the seller or supplier wishes to change the price. As the CJEU mentioned in RWE:

Those strict requirements as to the information to be given to the consumer, both at the stage of the conclusion of a supply contract and during the performance of the contract, as regards the right of the supplier unilaterally to alter the terms of the contract, correspond to a balancing of the interests of the two parties. To the supplier’s legitimate interest in guarding against a change of circumstances there corresponds the consumer’s equally legitimate interest, first, in knowing and thus being able to foresee the consequences which such a change might in future have for him and, secondly, in having the data available in such a case to allow him to react most appropriately to his new situation[9].

 

Incomplete or false information

 

The failure to clarify the annual percentage rate in the general terms or conditions of a credit agreement is relevant to determine whether a term is formulated in plain, intelligible criteria in light of the UCTD[10]. Importantly, essential information in a contract should be complete and clear.

In Photovost, the CJEU reinforced that unintelligible core terms in a contract will empower the court to assess the unfairness of the terms, regardless of the exclusion present in Article 4(2:

a national court is empowered to assess the unfair nature of such a term within the meaning of Article 3 of Directive 93/13. Even if such a term may be assessed as falling within the scope of the exclusion referred to in that article, it should be observed that the terms referred to in Article 4(2) of that directive, while they come within the area covered by Directive 93/13, escape the assessment as to whether they are unfair only in so far as the national court having jurisdiction should form the view, following a case-by-case examination, that they were drafted by the seller or supplier in plain, intelligible language.[11]

 

Average consumer as a vulnerable consumer

 

The yardstick on whether a term is drafted in “clear intelligible language” is whether “an average consumer would understand the consequences of the term”. This indicates that it is not so much the individual consumer, but rather the “typical” consumer, who should be able to understand the meaning of the term. It is relevant, however, to interpret the concept of an “average” consumer in light of the goal of the UCTD – which is to protect the consumer in a position of weakness vis-à-vis the trader, not only in terms of bargaining power, but also in level of knowledge, as referred to in the Kasler case[12]. It has been argued in literature that Article 7 of the CFREU comes into play with regard to the transparency test as developed by the CJEU. In the case of housing of particular vulnerable people, the average consumer is not the consumer who is able to foresee the economic consequences of a term[13]. This reasoning has also been applied in domestic court cases. For example, in Slovakia, the concept of an average consumer was interpreted in relation to the particular circumstances of vulnerable groups[14].

Furthermore, EU law takes into consideration the suboptimal attention of consumers, even in the presence of comprehensive and correct information[15]. In Jean-Claude Van Hove v. CNP Assurances, SA, the CJEU stated “the consumer cannot be required, when concluding related contracts, to have the same vigilance regarding the extent of the risks covered by that insurance contract as he would if he had concluded that contract and the loan separately”^[16]. A similar mitigating approach was taken by the CJEU in Katalin, where it held that “even assuming that the general information the consumer receives before concluding a contract satisfies the requirement under Article 5 that it be plain and intelligible, that fact alone cannot rule out the unfairness of a clause providing for the exclusive competence of a single arbitration tribunal”[17]. Moreover, sector-specific directives have introduced the notions of “energy poverty” and “vulnerable consumer”[18].

In conclusion, in order for a term to be transparent, it needs to be drafted in a manner, which allows an average consumer to foresee the economic consequences of that term. In mortgage lending contracts, the “average” consumer must be interpreted in light of the particular vulnerable circumstances of that context. Specifically, mortgage debt is commonly a life-long commitment, blind to unpredictable circumstances both at an external and personal level. Vulnerable consumers are particularly affected by macroeconomic crises, often exacerbated by sudden events such as losing a job, falling ill or losing a loved one.