11 October 2019 | By Michael Thaidigsmann
Relief for Polish mortgage borrowers as EU top court allows conversion of Swiss franc-based loans
The Court of Justice of the European Union (ECJ) has ruled in favour of Polish consumers who took out mortgages in Swiss francs and have later struggled to repay them. The judgment will allow borrowers to ask courts in Poland and possibly other countries to convert the loans back into local currency.
Kamil and Justyna Dziubak were among an estimated 700,000 Poles who took out mortgages out in foreign currencies, mainly in Swiss francs, given that these loans offered lower interest rates at the time. However, many borrowers have been struggling to make repayments after Switzerland’s central bank ended the currency’s peg against the euro in January 2015.
In 2008, the Dziubaks signed a mortgage contract with Raiffeisen Bank. Although the funds were made available to the couple in Polish currency, the outstanding sum due and the monthly repayments were expressed in Swiss francs, and repayments were required to be debited in złotys from the borrowers’ bank account.
When loan was disbursed to the couple, the outstanding debt was determined on the basis of the exchange rate between the two currencies applied by the bank on the day of the disbursement. However, monthly repayments were calculated in accordance with the złoty-Swiss franc selling rate that was applied by that bank at the time they fell due.
Having concluded a loan contract indexed to Swiss francs, the Dziubaks benefitted from an interest rate based on the rate of that currency, which was lower than the rate applicable to złotys, but they were exposed to an exchange risk resulting from exchange rate fluctuation.
The borrowers brought an action before the Regional Court of Warsaw and asked the judge to declare the mortgage contract void on the grounds that the terms related to the exchange rate were unfair, unlawful and therefore not binding on them, in accordance with the Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts.
According to the plaintiffs, once the contested terms are removed, it would be impossible to determine the correct exchange rate. As a result, the contract could not continue in existence. In addition, they submitted that, even if it appeared that the loan contract could be executed without those terms as a loan contract expressed in złotys but no longer indexed to Swiss francs, the loan would continue to be subject to the more advantageous interest linked to the franc.
Following discrepancies in jurisprudence in Poland, the Warsaw court referred the case to the European Court of Justice. It asked if under certain circumstances, a national court may substitute an unfair term with a provision of national law in order to restore a balance between the parties to the contract and maintain the validity of the contract.
The Polish court also sought clarification on whether, after their removal, the unfair terms may be replaced by general provisions of Polish law which provide that the effects expressed in a contract are to be completed by the effects arising from the principles of equity or established customs. Moreover, the EU’s top court was asked to pronounce judgment on whether the EU directive permits Polish courts to annul the contract.
In its ruling (C-260/18), the Court of Justice held that the possibility of substitution established by the Kásler judgment was restricted to supplementary provisions of national law or those applicable in the event of agreement by the parties and is based, inter alia, on the ground that those provisions are presumed not to contain unfair terms.
Those provisions were presumed to reflect the balance that the national legislature wished to establish between the rights and obligations as a whole of parties to certain contracts in cases where the parties did not depart from a standard rule laid down by the national legislature for the contracts concerned or expressly selected the applicability of a rule established by the national legislature for that purpose.
However, those general provisions of Polish law referred to did not appear to have been specifically assessed by the legislature in order to establish that balance, and they did thus not benefit from the presumption that they were not unfair.
ECJ: Contract provisions must be assessed in light of events
Consequently, the Court found that these provisions could not remedy the gaps in a contract caused by the removal of unfair terms that appeared in it. Since the possibility of substitution sought to ensure the attainment of consumer protection by safeguarding consumers’ real and actual interests against possible detrimental consequences from the annulment of the contract, the consequences had to be assessed in relation to the current or foreseeable circumstances at the time of the proceedings relating to the removal of the unfair terms concerned – and not those existing at the time when the contract was concluded.
Under the directive, a contract from which the unfair terms had been removed remained binding on the parties as regards the other terms that it contained, provided that such contract could continue in existence after the unfair terms were removed and that such continuity of the contract was legally possible under domestic law.
The EU justices pointed to the Warsaw court’s assessment that, after the removal of the terms on the difference in exchange rate, the nature of the main subject matter of the contract had appeared to be altered by the cumulative effect of abandoning the indexation to the CHF and the continued application of an interest rate based on the exchange rate with the Swiss franc. Since such an alteration appeared to be legally impossible under Polish law, the EU directive did not preclude the annulment of the contract by the Polish court.
The ECJ emphasised that the deletion of the terms at issue would lead not only to the removal of the indexing mechanism and the exchange difference but also, indirectly, the loss of the exchange risk, which was directly connected to the indexation of the loan to a currency. The judges recalled that the terms relating to the exchange risk defined the main subject matter of a contract for a loan indexed to a foreign currency such that the objective possibility of maintaining the loan contract at issue appeared uncertain.
Finally, the court also recalled that, where the consumer preferred not to rely on the system of protection established by the directive against unfair terms, it did not apply. The consumer had to be able, in accordance with that system, to refuse to be protected against the detrimental consequences caused by the annulment of the contract as a whole where he or she did not wish to benefit from that protection.
More EU countries affected
Commenting on the decision, Finance Minister Jerzy Kwiecinski said the position of Polish consumers had been strengthened by the ECJ ruling. However, financial analysts said it posed a risk for the stability of the złoty. ING analysts, for example, noted that the ruling would likely trigger more court cases and place a burden on the affected banks’ profits.
Other countries might be affected by the ruling as well. In Croatia, the Supreme Court last month ruled in favour of consumers in a case also concerning loans pegged to the Swiss franc. The Croatian judges found that banks had breached the collective interests and rights of borrowers who took out loans pegged to the Swiss franc.