Unfair terms in banking agreements: developments over 2021/2022

They are not specific to loan agreements or even to banking agreements; they apply to all contracts. Under these regulations:

• for a term to be deemed unfair, there must be an imbalance: the first paragraph of Section L 212-1 of the Consumer Code stipulates that “[i]n contracts between professionals and consumers, terms that have the object or effect of creating a significant imbalance in the rights and obligations of the parties to the contract, to the detriment of the consumer, shall be deemed unfair”;
• the third paragraph of the same section stipulates that “[a]ssessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.”

The Consumer Code lists a whole series of terms that are presumed to be unfair – a presumption that is rebuttable in certain cases (R 212-1) but not others (R 212-2). The list is not exhaustive, however. The courts thus play a vital role in deciding which terms can be regarded as unfair. And not just the French courts, but also the Court of Justice of the European Union (CJEU), given that this legislation stems from an EU Directive. France has also set up an Unfair Terms Commission, tasked with publishing regular recommendations that serve as a reference for the courts when dealing with cases on unfair contract terms.

A lot happened over 2021 and the first months of 2022. The Unfair Terms Commission issued Recommendation 21-01 of 10 May 2021 (published in the official gazette dated 17 May 2021) and there were a number of key court rulings – on loan agreements denominated in Swiss francs, and on the hierarchy between the various legislative provisions applicable, given that the law on contractual imbalances is not only to be found in the Consumer Code.

Recommendation 21-01 of 10 May 2021

The Commission’s recommendation lists 45 terms regarded as being unfair. It groups them into four categories: terms that can be found in all types of loan agreement, terms specific to semi-revolving instalment loan agreements, terms specific to instalment sale agreements, and terms specific to hire-purchase agreements. The terms listed cover a wide range of topics, including the right to withdraw, joint and several liability, proof, the pre-contractual duty to inform, acceleration, termination and penalties.

Hierarchy of domestic provisions

Contractual imbalance is the key element that defines a term as being unfair under Section L 212-1 of the Consumer Code. But the same concept also crops up in Section 1171 of the Civil Code, as worded pursuant to Governmental Order 201-131 of 10 February 2016: “In a pre-formulated standard contract, any non-negotiable term that creates a significant imbalance between the rights and obligations of the parties to the contract is deemed null and void.” And again in Section L 442-1(I) of the Commercial Code: “Any manufacturer, trader or service provider who, when negotiating, signing or performing a contract, pursues any of the following practices, shall be held liable and obliged to make good the damage caused: 1) Deriving or seeking to derive a benefit from the other party without providing consideration or else a benefit that is manifestly disproportionate to the value of the consideration provided (…)”. It is therefore essential to determine the hierarchy between these provisions.

In a judgment handed down on 26 January 2022 in case No. 20-16.782, the Cour de cassation held that: “the legislative history on the Act of 20 April 2018 ratifying” the governmental order of 10 February 2016 “indicates that the legislator intended Section 1171 of the Civil Code on the ordinary law of contracts to apply to unfair terms in contracts not covered by either Section L. 442-6 of the Commercial Code or Section L. 212-1 of the Consumer Code” (paragraph 5).

Loan agreements denominated in Swiss francs

The Helvet-immo loan resulted in some highly significant case-law. In 2021, the CJEU held that terms in a foreign-currency mortgage loan agreement that stipulated that payments at fixed intervals were to be allocated first to interest and that extended the agreement’s term and increased the monthly instalments in order to pay the account balance were unfair (CJEU, 10 June 2021, C-609/19). In another ruling, it held that there was no limitation period on applications to have a term declared unfair (CJEU, 10 June 2021, C-776/19 to C-782/19).

The Cour de cassation followed the CJEU’s case-law on limitation in its judgment of 30 March 2022 in case No. 19-17.996. Shortly thereafter, in its judgment of 20 April 2022 in case No. 19-11.599, it held that a term on account currency that referenced an exchange rate that would fluctuate, potentially extending or reducing the amortisation period of the loan, should be assessed in light of the criteria laid down by the CJEU. The Cour de cassation also considered the question of bankers’ liability in this respect, creating a duty to inform, so as to ensure that borrowers understand what the terms of their contracts entail and the negative impact such terms could have in the event of an unfavourable change in circumstances.

Other judgments from the Cour de cassation and the CJEU

The CJEU has also ruled on claims for restitution of sums paid unduly on the basis of unfair terms (CJEU, 22 April 2021, C-485/19). And the Cour de cassation has held that a term allowing a lender to terminate an agreement on the grounds of a lack of good faith (the borrower having provided false information that was material to the lender’s decision to grant the loan) did not create a significant imbalance in the rights and obligations of the parties to the detriment of the consumer – despite the lender being allowed to terminate without notice and without the borrower having missed any payments – and was therefore not unfair (Cass, Civ. 1, 20 January 2021, case H 18-24.297).

Conclusion

This recent case-law has resulted in a certain amount of casuistry. While it may seem as if bankers have been dealt a harsh blow, the reality is more subtle than that. Not all of the case-law has in fact been bad news for bankers. It all depends on how the contract terms are worded.