Swiss franc loans and the importance of the european’s court of justice ruling.

Swiss Franc Loans and the Importance of the European’s Court of Justice Ruling.

The recent decision of the European Court of Justice, in respect of the case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt combined with the empowerment and almost equation of the exchange rate of Swiss Franc and Euro, has spurred the issue of the conclusion of loans in Swiss Francs in a crucial issue for many creditors – not only in Cyprus. In this respect, the conclusion of loans in Swiss Francs has already received a huge social and political dimension.

The indignation of creditors, who experienced a substantial increase in their balances on their loans and payments, forced them to resort to legal measures, in an attempt to preserve their legal rights and entitlements.

The initiative of various judicial processes, before national European Courts, as well as their respective decisions, mostly in favour of the creditors, have played a prominent role in the protection of creditors’ legal rights and the treatment of lending contracts, contained controversial and damaging clauses. Consequently, national European Courts have explicitly adopted decisions in favour of the creditors.

What is, however, important and worth having knowledge about, especially for those who concluded loan agreements with Banks in Swiss Francs, is the decision of the European Court of Justice, in the aforementioned Kásler case.

According to the case, under consideration, Kásler and Káslerné Rábai concluded a loan agreement with a Hungarian bank, which provided, amongst others, that: “the lender [namely the bank] is to determine to amount in HUF of each of the monthly installments due by reference to the selling rate of exchange for the foreign currency applied by the bank on the day before the due date”.

The European Court of Justice, relying on the Directive 93/13/EEC, held inter alia, but most importantly that the above-mentioned clause of the loan agreement is unfair, due to its “vague and incomprehensible wording”. More specifically, the Court established the principle that “as regards a contractual term such as that at issue in the main proceedings, the requirement that a contractual term must be drafted in plain intelligible language (article 4.2 of the Directive) is to be interpreted as requiring not only that the relevant term should be grammatically intelligible to the consumer but also that the contract should set out transparently the specific functioning of the mechanism of conversion for the foreign currency to which the relevant term refers and the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan, so that consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it”.

Furthermore, the European Court of Justice acknowledged to the Hungarian Court the authority to replace the unfair and invalid clause, with a national default provision, provided that the national legislative order, permits so. On this ground, the Hungarian Court decided that the installments falling due, would be paid to the bank on the basis of the Euro – Swiss Franc exchange rate, applicable on the day of the conclusion of the loan agreement.

As far as the Directive 93/13/EEC is concerned, that has been incorporated in the Cypriot legislation, via the passing of the Unfair Terms in Consumer Contracts Act 1996.

It is worth noting that both the aforementioned legislation and the decision of the European Court of Justice are not applicable to all loan agreements. The Act in question only applies in relation to such contractual clauses that have been concluded between a bank and one or more consumers and which has not been individually negotiated, in the sense that the clause and/or the contract to which the clause forms part, has been drafted in advance and the consumer has therefore not the power to influence the substance of its content, even if he made an effort to do so.

In an attempt to access the unfairness of such a contractual clause, the Court takes into account the nature of the offered services, the prevailing circumstances at the time of the conclusion of the loan agreement and all the other clauses of the contract, in question. Another factor of major importance that the Court takes into account is whether and, if so, at what extent the consumer/creditor has been induced by the bank to conclude a Swiss Franc loan agreement (as it is in the case in the majority of the agreements).

Recently, in Cyprus, the first partial vindication of a creditor was heard before the District Court of Nicosia in a case that contested the banks overcharges and the financial loss, caused by the depreciation of the exchange rate between the Swiss Franc and the Euro. The loan was granted by the bank for the purpose of funding emergency housing.

The Plaintiffs (creditors), as with the majority of bona fide creditors, paid their loan instalments meticulously and regularly. However, their loan never reduced over time and, in fact, continued to increase.

The Cypriot Court, correctly interpreting the European Directive 93/13/EEC of the unfair terms in loan contracts, applied the European Precedent of the European decision C-26/13 Kásler and Káslerné Rábai v OTP Jelzalogbank Zrt dated 30/04/2014 regarding the borrowing of Swiss Francs and questioned the clauses that weakened the other parties’ negotiation chances and, in particular, the bank’s position of “take it or leave it” that was in violation of the borrowers’ principles of autonomy and their contractual freedoms.

The Cyprus Court, based its ruling on to the decision of the European Court of Justice in the case of Kasler and subsequently provided the guidelines, with regard to the understandable wording of the terms & provisions, in an attempt to secure that any future terms will be meaningful and clear to the creditors.

It is widely viewed that the judge’s final verdict will primarily focus on ‘whether the manner and kind of lending, represents a common loan agreement, for which the creditor knows in advance that he will be required to pay back a specific amount, including the relevant interest on the loan’.

In the specific case, the Court rightly determined that the creditor was not in a contractual position to have a knowledge of the loan’s entire sum and thus has a clear view of the rights/obligations between the lender and creditor. This type of loan contracts, the content is usually unknown and/or undefined and/or unclear, with regard to the repayment. Moroever, this kind of contarcts are reliant on exchange rate fluctuations (between the currency of the loan contract and the currency of the borrower’s income), including the variable interest rates imposed on the loan.

Although, the Cyprus Government has, to date, not taken a stance on this matter, the Cypriot justice system has followed both European Case Law, in an attempt to secure creditors’ interests, from contracts containing unfair and concealed terms ( a common practise by the banks for the sole purpose of gaining a profit).

The first Cypriot judgment (albeit interim) regarding Swiss Franc loans, in conjunction with the European Legislation and Law, is a formidable safeguard available to borrowers in difficulty, who wish to restore through the Courts the financial losses that they have suffered.

Referring back to the decision of the European Court of Justice in the Kásler

Case, it is important to mention that the Court has not established a principle on unfairness of absolute and universal application and has neither suggested that all contractual clauses, included in loan agreements, providing for the calculation of instalments falling due on the basis of the exchange rate applicable on the day of the payment of the instalment or, in any case, on the basis of an exchange rate different from the one on the day of the conclusion of the contract, should be considered as invalid.

Nevertheless, the decision clearly and rigorously defines that a clause in a loan agreement providing for the calculation of the instalments must present, in a transparent, clear and comprehensible to the borrower way, the conversion mechanism of Swiss Francs in Euros, the way of its operation and also the relationship between that mechanism and the release mechanism of the loan so that the borrower to be able to weigh the potential risk and assess in a clear and comprehensive way the financial effects and the meaning of concluding a loan agreement in Swiss Francs.

Certainly, although a clause, which merely provides that the monthly instalments for the repayment of a loan will be paid in Euros on the basis of the exchange rate of Euro – Swiss Francs or the selling price of Swiss Franc on the day of payment of the instalment, is grammatically correct and thus understandable, it is regarded as unfair. This mainly occurs since there is no mechanism of clear and comprehensive explanation to the borrower of the way of calculation of the financial impacts, positive or negative, which are involved in a decision to conclude a loan agreement in Swiss Francs.

Admittedly, the aforementioned decision of the European Court of Justice has equipped the borrowers with a strong negotiating means against the banks. Therefore, the borrowers are advised to use it properly in order to take full advantage of it, i.e. borrowers and potential borrowers should make use of the decision of the European Court of Justice while negotiating a loan agreement with the bank.

Notwithstanding, it is always advisable, at first instance, to obtain legal advice in order to be informed as to whether they can proceed on the basis of that decision. In any case, however, the borrowers must be extremely careful before signing any of the documents presented to them by the bank. Apparently, the banks will attempt to convert all loan agreements concluded in Swiss Francs in Euros in order to avoid the possibility that the borrower may require, through negotiations or through civil actions, the application of the exchange rate of the Swiss Franc – Euro on the day of the conclusion of the loan agreement.