Unfair terms in consumer contracts and the impact on lending institutions

There is a positive duty on Irish Courts to identify if a term in a consumer contract is unfair and thereby contrary to the Unfair Contract Terms Directive 93/13/EEC (The Directive). The Directive applies to any term in a contract between a business and a consumer.

For the purposes of this article, the relevance of the Directive to contracts made between lending institutions and their customers will be focused on.

As recent case law suggests, the Directive is becoming a common defence used against lending institutions in summary judgment and enforcement proceedings.

Case Law

Mr Justice Max Barrett, in his 2016 Judgment in AIB v Counihan[1], focused attention on European consumer rights and in particular on unfair terms in consumer contracts. The defendants were customers of AIB and their defence to the Bank’s application for summary judgment was grounded on the basis that the originating loan documents contained unfair terms and were therefore contrary to European Law. In refusing AIB’s application for summary judgment and transferring the matter to plenary hearing, Mr Justice Barrett stated that Irish Courts have a positive duty to establish if terms in a consumer contract are unfair – even if the issue was not raised by either party. It is important to note that although Mr Justice Barrett focused on the issue of unfair terms, it was ultimately found that the Bank’s contract did not contain unfair terms.

In his decision, Mr Justice Barrett, referred to a landmark judgment of the Court of Justice of the EU (CJEU). In 2013 the CJEU applied the Directive in Aziz v Catalunyacaixa[2]. In Aziz, the case was appealed to the CJEU from the Spanish Courts. Mr Aziz sought the annulment of a clause in his mortgage loan agreement on the basis that the clause was unfair. The CJEU held that Spanish law had breached the Directive by not permitting a debtor to object to mortgage enforcement proceedings on the grounds that one of the terms in the mortgage loan agreement was unfair. The CJEU determined that Courts have a positive obligation to assess if a consumer agreement contains unfair terms, considering the imbalance which exists between a business and a consumer.

The High Court will consider this issue again soon, in Grant v Laois County Registrar[3]. In this case, a couple have been given leave to judicially review the County Registrar’s decision in granting an order for possession over their Principle Private Residence as the County Registrar failed to consider the fairness of the terms contained in their mortgage.

Prejudice to the consumer?
In deciding if the terms are unfair, the test to be applied is if the consumer will be prejudiced by the term. The Directive provides that terms in a consumer contract must be expressed fully, clearly and legibly. Under Article 3, any term which has not been individually negotiated will be regarded as unfair if it causes a significant imbalance in the parties’ rights and obligations arising from the contract, to the detriment to the consumer. Circumstances of the parties such as the strength of bargaining positions, must be taken into consideration when assessing if a term is unfair.  Article 5 provides that if there is doubt over the meaning of a term, an interpretation most favourable to the consumer will prevail.

Impact on Lending Institutions
As can be seen in the decision in AIB v Counihan, the provisions of this Directive (which was implemented in Ireland by the EC (Unfair Terms in Consumer Contracts) Regulations, S.I. No. 27/1995) has far reaching consequences for lending institutions.

If a term in a consumer contract is found to be unfair, the term must be removed from the contract. The rest of the contract will remain in place but the ‘unfair’ term will not be binding on the consumer.

Lending institutions must be confident that their contracts are drafted in a plain and transparent manner, as if there is any ambiguity an interpretation most favourable to the consumer will prevail.

For more information contact Gill Cotter, Solicitor in our Debt and Asset Recovery Department.

[1] Allied Irish Banks PLC v Peter Counihan and Mary Counihan [2016] IEHC 752 Barrett J, 21 December 2016

[3] Geraldine and Martin Grant v Laois County Registrar [2016] 787JR