Consumer Arbitration in the EU: A Forced Marriage with Incompatible Expectations

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1 Journal of International Dispute Settlement, Vol. 2, No. 1 (2011), pp doi: /jnlids/idq017 Published Advance Access December 9, 2010 Consumer Arbitration in the EU: A Forced Marriage with Incompatible Expectations MAUD PIERS* This article explores the way in which the European Union (EU) legal order interacts or maybe rather collides with the world of arbitration. The EU invariably refuses to consider arbitration as a full-fledged alternative to court proceedings. Arbitrators, in turn, take great liberty in defining the legal rules to which they will adhere. This article offers no prescriptions on how both worlds should ideally coexist but rather examines how and why they continue to operate as two distinct and almost antagonistic legal orders. It also points to the potential consequences of this stand-off for both legal orders. The article focuses on consumer regulation/arbitration. The case-law ensuing from the Directive 93/13 on unfair terms in consumer contracts offers a particularly useful starting point for this inquiry. A. Research Setting 1. Introduction This article explores the way in which the European Union (EU) legal order interacts with the world of arbitration. It focuses in particular on the EU s rules regarding consumer protection and analyses how they affect the consumer arbitration laws and practice of the EU member states. This analysis starts from the basic assumption that the EU and the arbitration legal context function according to an entirely different dynamic. The EU embodies a set of rules and institutions that serve a particular purpose and have emerged from a context that is, at least in part, unique to that institution. It has never shown much of an interest in arbitration and has invariably refused to consider arbitration as a full-fledged alternative to court proceedings. Arbitrators, in turn, do not want to be placed in the same category as state court judges and consistently take great liberty in defining the legal rules to which they will adhere. Arbitration * The author is Postdoctoral Researcher with the Fund of Scientific Research Flanders (FWO-Vlaanderen) at the University of Ghent (Belgium). maud.piers@ugent.be. The author would like to thank Professor Reinhard Zimmermann for his support and valuable comments during her stay as a Konrad Zweigert scholar at the Max Planck Institute for Comparative and International Private Law (Hamburg, Germany), Mr Angus Johnston for sharing his ideas and insights on this topic, as well as Dr Paul Cook for his linguistic suggestions. ß The Author Published by Oxford University Press. All rights reserved. For permissions, please journals.permissions@oup.com

2 210 Journal of International Dispute Settlement implies a degree of autonomy from ordinary state court proceedings and thereby operates with a degree of independence from the legal order. At the same time, it is undeniable that this form of extra-judicial dispute resolution is important in the economic sphere that is the subject of European regulations. And it is precisely at this point where both legal orders collide. This article will offer no prescriptions on how both worlds should ideally coexist. It rather will ascertain how and why they continue to operate as two distinct and almost antagonistic legal orders. It will also point to the potential consequences of this stand-off for both. B. Research Questions This article starts by introducing the principle of procedural autonomy (Section 2). It does so before examining the way European legislation directly or indirectly shapes national arbitration laws. It will then focus on the relevance of EU consumer protection policy to domestic arbitration law. The case-law ensuing from the Directive 93/13 on unfair terms in consumer contracts offers a particularly useful starting point for an inquiry into the effect this Directive has had on the validity of an arbitration agreement, on the one hand, and the powers of arbitrators and the judiciary on the other. Both cases raise a number of questions concerning the ambiguity between the freedom member states enjoy to organize arbitration proceedings in an autonomous and efficient fashion and the growing EU movement to protect consumers through an ever mounting array of legal relationships. I will deal with the underlying questions of how and whether such profound regulation of procedural law is desirable and can be legally justified. I will also explore whether the European Court of Justice s (ECJ) interpretation of the Directive 93/13 is compatible with the inherent nature of (efficient) arbitration. To that end, the article will consider a number of matters related to the public policy nature of the provisions guiding consumer protection; the duty of arbitrators to examine the validity of the arbitration clause sua sponte; the dividing line between an acceptable degree of court review and the generally renounced far-reaching review on the merits; alternative methods through which the goal of consumer protection could be also secured without derailing the fundamental procedures and assumptions of arbitration; and the conformity of the ECJ s case-law with the spirit and requirements of the national rules on the enforcement of arbitral awards. 2. European Legislation and Procedure A. The Principle of Procedural Autonomy The EU is traditionally expected to refrain from any direct interference with general national procedural law. It is largely considered the primary duty and

3 prerogative of the member states to set up their own national legal systems. This is referred to as the principle of procedural autonomy. 1 This principle, however, has not prevented the ECJ from developing several protection mechanisms to ensure that the national courts give adequate effect to EU law pursuant to Article 4 (3) of the Consolidated Version of the Treaty of the EU. 2 B. Cracks in the Wall It has become clear in the past decades that the so-called principle of procedural autonomy is not intended to give the member states carte blanche on matters of procedural law. There is not necessarily a clear partition between the areas of competence of the EU and those of its member states. In the past two decades, the EU has displayed a growing inclination to engage in procedural law issues. C. European Legislation Consumer Arbitration in the EU 211 The EU has taken various regulatory initiatives on matters that were previously governed by national law or international conventions. The Mediation Directive 3 and Insolvency Directive, 4 as well as the Brussels I Regulation 5 are but a few examples. The Treaty of Maastricht expressly identified matters of procedural law as an area of common interest, 6 while the Treaty of Amsterdam defined it as a matter of European Community policy. 7 The Treaty 1 The landmark case in this regards is: Court of Justice Case 33/76, Rewe v Landwirtschaftskammer Saarland, [1976] ECR For a general discussion and an analysis of the various cases on procedural autonomy, see also K. Lenaerts and D. Arts, Procedural Law of the European Union, (Sweet & Maxwell, London 1999) 57 76; P.P. Craig and G. De Burca, EU Law. Text, Cases and Materials (3 rd edn OUP, 2008) 306 9; T. Eilmansberger, The Relationship between Rights and Remedies in EC Law: In Search of the Missing Link (2004) 14 CML Rev ; T. Krümmel and R.M. D SA, Implementation by German courts of the Jurisprudence of the European Court of Justice on State Liability for Breach of Community Law as Developed in Francovich and Subsequent Cases (2009) 273 EB Law Rev 273; J.H. Jans and A.T. Marseille, Joined Cases C /05, Van der Weerd and others v Minister van Landbouw, Natuur en Voedselkwaliteit, Judgment of the court (Fourth Chamber) of 7 June 2007, [2007] ECR I-4233 (2008) 45 CML Rev 853; S. Prechal, Judge-made harmonization of national procedural rules: a bridging perspective in J. Wouters and J. Stuyck (eds), Principles of proper conduct for supranational, state and private actors in the European Union: towards a Ius Commune, (Intersentia, Antwerp 2001) 39; M. Accetto and S. Zleptnig, The principle of effectiveness: rethinking its role in community law (2005) EPL 375; S. Prechal, Community Law in National Courts: The Lessons from van Schijndel (1998) 35 CML Rev 681; G. de Búrca, National Procedural Rules and Remedies: the Changing Approach of the Court of Justice, in J. Lonbay and A. Biondi (eds), Remedies for Breach of EC law (John Wiley and Sons, Chichester 1997) This provision lays down the principle of cooperation that implies that member states courts have a duty to use all possibilities afforded to them under national law to take appropriate measures to ensure the fulfillment of all obligations arising out of the Treaties or resulting from the acts of the institutions of the Union. Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union, OJ 2008, C 115 (hereinafter referred to as TFEU). 3 Council Directive (EC) 2008/52 of the European Parliament and of the Council on certain aspects of mediation in civil and commercial matters [2008] OJ L 136/3. 4 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2001] OJ L 12/1. 5 Council Regulation (EC) No 1346/2000 on insolvency proceedings [2000] OJ L 160/1. 6 Treaty on the European Union [1992] OJ C 191/1. 7 Treaty of Amsterdam amending the Treaty on European Union, the treaties establishing the European Communities and certain related acts [1997] OJ C 340/173.

4 212 Journal of International Dispute Settlement of Lisbon, in turn, suggested that it was the EU s role to offer its citizens an area of freedom, security and justice without internal borders. 8 Many of the initiatives taken to realize this fundamental objective were officially coordinated through the Directorate General for Justice, Freedom and Security. 9 There have also been additional efforts to regulate only one specific area of the law. These sector-specific projects are set up by different Directorates General such as for instance the DG Competition 10 and, most importantly for this article, the DG Health and Consumers. 11 This decentralized regulatory approach has been criticized for a range of reasons. 12 D. European Case-law An analysis of the European case-law 13 attests to the proposition that the ECJ embraces a more intrusive approach and frequently plays a more interventionist role. The main mechanisms imposing stricter limits upon the principle of autonomy are the twin principles of equivalence and effectiveness. The principle of equivalence suggests that the applicable national conditions governing actions at law cannot be less favorable to the protection of the rights which citizens have from the direct effect of community law, than those relating to similar actions of a domestic nature. 14 The principle of effectiveness, in turn, prohibits an application of procedural rules of national law that would render the exercise of rights conferred by Community law virtually impossible or excessively difficult. 15 In examining whether the principle of effectiveness justifies that national procedural autonomy be reduced and in other words whether or not a national procedural rule satisfies the EU law requirement the ECJ balances off the interests served by the national rule in question against the objective 8 Art 2 Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community [2007] OJ C 306/10. 9 For an overview of the several projects of the DG Justice, Freedom and Security, consult its website: < 10 An example is the Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in arts 81 and 82 of the Treaty [2003] OJ L 1/1. This document regulates the competence of the national competition authorities and the courts to decide over issues related to arts 101, respectively, 102 TFEU. 11 The DG Sanco (or the DG Health and Consumers) is for instance working on a project with regard to collective redress (see in this regard the Green Paper on Consumer Collective Redress, (Green Paper) COM (2008) 794 final, 27 November 2008) and was also involved in the drafting of the Council Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European Small Claims Procedure [2007] OJ L 199/1. The initiatives discussed in paras 6 ff are equally initiatives of this DG. 12 M. Tulibacka, Europeanization of civil procedures: in search of a coherent approach (2009) 46 CML Rev 1528; A. Storskrubb, Civil Procedure and EU Law. A policy area uncovered (OUP, 2008) 13 ff. 13 It is not within the scope of this article to give an in-depth overview of all the landmark cases that shaped the ECJ s take on the national courts duties and obligations. I will refer to them in footnotes and only touch upon them when relevant for explaining the reasoning of the ECJ in the cases analyzed below and to underpin my arguments. 14 See in this regard: Court of Justice Case 33/76, Rewe v Landwirtschaftskammer Saarland [1976] ECR 1989 para See in this regard: Court of Justice Case 45/76, Comet v Produktschap voor Siergewassen [1976] ECR 2043 para 12 to 16.

5 purported by the EU rule. The introduction of the procedural rule of reason 16 (or the purposive approach) 17 gave the Court some guidance on how to conduct this balance-seeking exercise, and concurrently accorded it greater leeway. Some criticize the ECJ s more recent case-law in which it subjects national procedural rules to ever-increasing scrutiny and where it follows an ad hoc approach which threatens to undermine legal certainty. 18 Others question the academic myth 19 of procedural autonomy, or rather read a dé doublement fonctionnel 20 of the national courts duties in the European case law. 21 Others still have commented on the value of maintaining procedural diversity and argue in favor of greater EU intervention in procedural matters in order to enhance the application of Community law in the national courts. 22 A. Sectoral Approach Consumer Arbitration in the EU European Legislation and Arbitration What has been said in the previous paragraphs with regard to the EU s approach to procedural law in general is also reflected in the law of arbitration. There is hardly any European legislation that directly and/or generally interferes with rules of procedure applying to domestic or international arbitration. 23 There have, however, been some initiatives which directly aim at regulating the arbitration procedure in particular legal contexts. The EU s efforts 16 This term was used by Prechal (n 1). 17 This rule entails that each case which raises the question whether a national procedural provision renders application of Community law impossible or excessively difficult must be analysed by reference to the role of that provision in the procedure, its progress and its special features, viewed as a whole, before the various national instances. In the light of that analysis the basic principles of the domestic judicial system, such as protection of the rights of the defence, the principle of legal certainty and the proper conduct of procedure, must, where appropriate, be taken into consideration. This rule was stated in: Court of Justice, Joined Cases 430/93 and 431/93, Jeroen van Schijndel and Johannes Nicolaas Cornelis van Veen v Stichting Pensioenfonds voor Fysiotherapeuten [1995] ECR I-4705 para A. Biondi, The European Court of Justice and Certain National Limitations: Not such a Tough Relationship (1999) 36 CML Rev E. McKendrick, Modifying Procedural Autonomy: Better Protection for Community Rights (2000) 4 ERPL 565, C.N. Kakouris, Do Member States Possess Judicial Procedural Autonomy? (1997) 34 CML Rev Ibid 1389; N. Reich, Horizontal Liability in EC Law: Hybridization of Remedies for Compensation in case of Breaches of EC Rights (2007) 44 CML Rev ; E. McKendrick (n 19) 565; F. Bruder, Burden of Proof and the Unfair Terms in Consumer Contracts (2007) 2 EPRL 205, M. Andenas, National Paradigms of Civil Enforcement. Mutual Recognition or Harmonization in Europe? (2006) 529 EBLR 530. On the various views on this matter, see S. Prechal (n 16) 25 CMLR However, note the ongoing debate on (partially) deleting the exclusion of arbitration from the scope of the Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This might lead to the result that court proceedings dealing with arbitration come within the scope of the Regulation. See in this regard Green Paper on the review of Council Regulation (EC) no 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, (Green Paper) COM (2009) 175 final, 8 9, 21 April 2009; Hess and others, The Brussels I-Regulation (EC) No 44/2001: the Heidelberg Report on the Application of Regulation Brussels I in 25 member states, (Beck/Nomos-Verl, 2008) 229.

6 214 Journal of International Dispute Settlement in the context of consumer protection provide an important example. 24 In this same area of the law, EU substantive law also seems to affect arbitration proceedings, at least indirectly. The next paragraphs provide a short overview of a number of initiatives that the EU put in motion to guarantee fair consumer arbitrations. Paragraph 10 ff. then focus upon the indirect way in which (substantive rules of) European consumer law shapes the national arbitration laws. B. Procedural Law Initiatives It has become one of the EU s main objectives to promote the interests of consumers and to ensure a high level of consumer protection. 25 The EU also promotes the development of out-of-court dispute resolution mechanisms for consumer disputes through establishing quality standards which each of these Alternative Dispute Resolution (ADR) mechanisms should meet. 26 With regard to procedures where a third party formally adopts a position on the possible resolution of a dispute (as in arbitration), there are two relevant EU initiatives. First, there is the Communication from the Commission on the out-of-court settlement of consumer disputes 27 that contains the Commission Recommendation 98/257 of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes. 28 This Recommendation is addressed to (i) out-of-court dispute settlement bodies, (ii) persons responsible for the creation or operation of such bodies, and (iii) Member States. It sets out seven principles with which out-of-court dispute mechanisms should comply. 29 These are the principles of 24 A more traditional example is competition law. The debate on the relationship between arbitration and the EU legal order was traditionally centered around competition law issues and the duties and powers of arbitrators in this context. See N. Shelkoplyas, The Application of EC Law in Arbitration Proceedings (Europa Law Publishing, 2003) 213 ff. 25 Art 169 TFEU. On this topic, see in F. Cafaggi and H.-W. Micklitz (eds), New Frontiers of Consumer Protection. The Interplay between Private and Public Enforcement (Intersentia, 2007) These different initiatives are found in: Green paper on the access of consumers to justice and the settlement of consumer disputes in the single market (Green Paper) COM (93) 576, 16 November 1993; Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market COM (1996) 13, 14 February 1996; Commission Recommendation 98/257 on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes [1998] OJ L 115/31; Communication from the Commission on the out-of-court settlement of consumer disputes (Communication) COM (98) 198, 30 March 1998; Communication from the Commission on widening consumer access to alternative dispute resolution (Communication) COM (2001) 161, 4 April 2001; Commission Recommendation on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes not covered by Recommendation 98/257/EC COM (2001) 1016, 4 April 2001; Green Paper on alternative dispute resolution in civil and commercial law (Green Paper) COM (2002) 196, April 2002, 19 April In addition though not restricted to consumer disputes the European Parliament and the Council have adopted the Directive 2008/52 on certain aspects of mediation in civil and commercial matters [2009] OJ L 136/3. 27 This document can be found on the website of the European Union, under the following link < eur-lex.europa.eu/lexuriserv/lexuriserv.do?uri=com:1998:0198:fin:en:pdf>. 28 [1998] OJ L 115/ This Recommendation is limited to out-of-court bodies where a third party proposes or imposes a decision to resolve a dispute. Para 1 of the Communication from the Commission on widening consumer access to alternative dispute resolution (Communication) COM (2001) 161, 4 April With regard to the distinction that is made between out-of-court bodies where a third party proposes or imposes a decision to resolve the

7 Consumer Arbitration in the EU 215 independence, transparency, adversariness, effectiveness, legality, liberty and representation. The second consumer-related European initiative is the Council Resolution on a network at Community level of national bodies responsible for the out-of-court settlement of consumer disputes. 30 The network, which is currently made up of 29 national contact points (eg clearing houses), 31 facilitates the lodging of consumer complaints and acts as a contact for consumers who wish to settle their disputes out of court in other Member States. 32 A 2008 report shows that the European Consumer Centers were contacted by over consumers for advice about their rights in the course of cross-border shopping in The European Commission has launched a similar initiative with regard to disputes involving financial services. 34 C. Recommendation on the Validity of Consumer Arbitration Clauses For the purpose of further analysis, I would like to highlight the principle of liberty articulated in Article VI of the Commission Recommendation 98/257. This provision advocates strong protection of the consumer s fundamental right to justice. It states that the use of the out-of-court alternative may not deprive consumers of their right to bring the matter before the courts unless they expressly agree to do so, in full awareness of the facts and only after the dispute has materialized. 35 Furthermore, Article VI indicates that an arbitral award (or generally a decision taken by the body concerned ) may only be binding on a party if that party is informed in advance of the binding nature of out-of-court procedures and has specifically accepted this. Important here is the provision in Article VI which provides that a consumer cannot legitimately opt for an out-of-court procedure prior to the materialization of a dispute, should this result in depriving the consumer of his right to have a state court decide over the settlement of his dispute. Although these rules are merely soft-law provisions, they do have a bearing on national arbitration practice. They recast perceptions both of a particular arbitration agreement s validity and the roles that arbitrators and arbitration institutions can play in dispute resolution. The organization and regulations of dispute and out-of-court bodies involved in the consensual resolution of consumer disputes, see COM (2001) 161 and COM (2002) 196 (n 26). 30 Council Resolution of 25 May 2000 on a network at Community level of national bodies responsible for the out-of-court settlement of consumer disputes (EEJ-net), s (2000) 405 < consumers/policy/developments/acce_ju st/acce_just06_en.pdf>. 31 One in each of the 27 member states plus one in Iceland and another in Norway. 32 < 33 The European Consumers Centers Network s Annual Report of 2008, available at the website of the European Union, at < 34 Information on this initiative is available on the website of the European Union, at < internal_market/finservices-retail/finnet/index_en.htm>. 35 Commission Recommendation 98/257 para 21.

8 216 Journal of International Dispute Settlement the arbitration institutions dealing with consumer disputes obviously shape these perceptions. 36 Soft law, however, is somewhat less influential. Directive 93/13 discussed below has had a more significant influence on national positive law. D. Substantive Rules: Directive 93/13 Directive 93/13 on Unfair Terms in Consumer Contracts imposes upon the member states an obligation to apply sanctions to the use of abusive clauses in consumer contracts. Article 3(1) of the Directive provides that a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer. Consideration 1(q) of the Annex to the Directive provides examples and lists as unfair a term which operates by excluding or hindering the consumer s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions. Article 6(1) of the Directive requires that member states provide under their national law that such unfair term not be binding on the consumer. Pursuant to Article 6(2), member states should take the necessary measures to ensure that consumers do not lose the protection granted by the Directive by virtue of the choice of law of a non-member country s legal remedies if the contract in question has a close connection with the territory of an EU member state. The effect of the Directive 93/13 on arbitration is not limited to establishing the legal value of an arbitration agreement with a consumer. The ECJ has determined that the Directive 93/13 also lays down obligations for the courts deciding over the validity and enforceability of an arbitral award. In the Mostaza Claro v Centro Móvil Milenium 37 case of 26 October 2006, the ECJ determined that Directive 93/13 ought to be interpreted as meaning that a national court deciding on an action to set aside an arbitral award must determine whether the arbitration agreement was unfair and thus void, even in cases where the consumer had not pleaded its invalidity in the course of the arbitration proceedings but had only done so before the judge deciding over the annulment action. In the more recent decision of Asturcom v Rodríguez Nogueira 38 of 8 October 2009, the ECJ made a similar ruling with regard to the interpretation of a duty that the Directive 93/13 imposed on a national court hearing an action for enforcement of an arbitral award to find under certain 36 For a case-study regarding the influence of these Directives on the practice of consumer arbitration, see M. Piers, How EU Law affects Arbitration and the Treatment of Consumer Disputes: The Belgian Example (2005) 59 Disp Resol J and Court of Justice Case 168/05, Elisa María Mostaza Claro v Centro Móvil Milenium SL [2006] ECR I Court of Justice Case 40/08, Asturcom Telecomunicaciones SL v Cristina Rodríguez Nogueira [2009] ECR I

9 Consumer Arbitration in the EU 217 conditions that there is an unfair arbitration clause. The Mostaza case has been extensively analyzed by legal scholars but should be revisited in light of the more recent Nogueira decision. These two cases as well as the ensuing ECJ intervention will be extensively dealt with under the following title. 4. European Consumer Law Affecting Arbitration A. Mostaza Claro v Centro Movil Milenium (i) Reference for preliminary ruling In the case of Elisa María Mostaza Claro v Centro Móvil Milenium SL, the ECJ was asked to issue a preliminary ruling on the interpretation of Directive 93/13 in the context of an action to set aside an arbitral award. The question was whether a national judge hearing the action for annulment had to determine whether an arbitration agreement was void pursuant to the provisions on fairness of consumer contracts in Directive 93/13 and thus had to set aside the arbitral award, even in those cases in which the consumer had not raised this issue during the arbitration process but had only advanced this argument at the stage of the annulment proceedings. (ii) Facts Ms Mostaza Claro was a consumer who had failed to comply with the conditions of a telephone contract that she had concluded with the telecom company Móvil. Móvil initiated arbitration proceedings with the Asociación Europea de Arbitraje de Derecho y Equidad (AEADE). Ms Mostaza Claro was notified of this and was granted a ten-day period in which she could reject the arbitration proceedings and choose instead to go to court. Ms Mostaza Claro did not reject the arbitration proceedings, and filed submissions and presented evidence before the arbitral tribunal. The arbitral tribunal rendered an award against Ms Mostaza Claro. She contested the arbitral award before the annulment judge arguing that there was no valid arbitration agreement given the unfair nature of the arbitration clause and in light of the requirements provided for in the Directive 93/13. The court decided to stay the proceedings and referred the above mentioned question to the ECJ for a preliminary ruling. (iii) The ECJ s Reasoning The ECJ rendered a decision that apparently challenges the fragile equilibrium between an efficient arbitration and the effective protection of the substantive rights that EU law grants to the parties involved in the arbitration. The Mostaza decision, moreover, questioned the extent to which the EU may intervene in the EU member states (procedural) autonomy in order to secure effective consumer protection.

10 218 Journal of International Dispute Settlement (iv) Preliminary remarks The ECJ began by expressing its respect for the division of powers between European and state institutions. It stated that it is up to the national court to apply the law to the facts and to decide whether a term is unfair under Article 3(1) of the Directive. The ECJ also reiterated the principle of the procedural autonomy of the member states: it recognized that it is a matter of domestic legal order to set out the detailed procedural rules on how to ensure protection of the rights acquired by individuals under EU law. The court, however, immediately outlined the limits to the member states procedural autonomy by pointing out the principles of equivalence and of effectiveness. These two principles served as a stepping stone for the ECJ s further reasoning and its ultimate ruling. (v) Principle of effectiveness Member states design the legal frameworks through which EU rights are to be upheld on their territory. Procedural rules, however, may not render the exercise of rights conferred by the Community legal order impossible in practice or excessively difficult. The ECJ held that the consumer would not enjoy effective protection of his rights if his weaker position vis-à-vis the seller were not corrected by some sort of positive action, such as through the national court s power to determine of its own motion whether a term is unfair. Such power has been regarded as necessary to ensure the consumer s effective protection as required under Articles 6 and 7 of the Directive 93/13. The ECJ reasoned that the result sought by Article 6 of the Directive could not be achieved and the special protection regime established by the Directive in general would thus be undermined, if the national court were unable to determine whether an award should be set aside for the sole reason that the consumer did not plead the invalidity of the award during the arbitration proceedings. The ECJ had already established this rule in previous case-law (eg Océano Groupo) 39 regarding a trial court s power sua sponte to examine the validity of consumer clauses in light of Directive 93/13. (vi) Principle of equivalence Several parties in the case at hand argued that the ECJ s approach to have the court review the validity of the arbitration agreement even where the consumer did not raise such an objection in the course of the arbitration agreement would undercut the effectiveness of arbitral awards. The ECJ brushed this argument aside by relying upon the principle of equivalence, although it 39 Court of Justice Case 240/98, Océano Grupo Editorial SA v Roció Murciano Quintero [2000] ECR I The ECJ refers to this case in para 27. However, see also the less pro-active approach of the ECJ in Court of Justice Case 237/02, Freiburger Kommunalbauten GmbH Baugesellschaft & Co. KG. v Ludger Hofstetter and Ulrike Hofstetter [2004] ECR I On this point, see: H. Unberath and A. Johnston, The double-headed approach of the ECJ concerning consumer protection (2007) 44 CML Rev 1266 ff.

11 admitted that it is in the interest of efficient arbitration proceedings that review of arbitration should be limited to exceptional circumstances. However, the principle of equivalence required that national courts grant an application for setting aside an arbitral award based on the non-compliance with the EU rules of public policy, where its domestic rules of procedure require an equal action in the event of failure to observe national rules of this type. This line of reasoning was established in previous case-law (eg Eco Swiss). 40 (vii) Public policy? The next necessary step in the Court s reasoning concerned the qualification of the EU rules on consumer protection. The ECJ referred to Article 6(1) of the Directive as a mandatory provision and stated that it is the aim of the Directive to strengthen consumer protection. It then referred to Article 3(1)(t) of the former Consolidated Version of the Treaty establishing the European Community (EC) according to which the strengthening of consumer protection is a measure which is essential to the accomplishment of the tasks entrusted to the Community and to raising the standard of living and the quality of life in its territory. The ECJ subsequently pointed out the Eco Swiss-case which dealt with the duty of a national court to grant an application for annulment of an arbitration award for a failure to comply with the prohibition laid down in Article 101 EU (ex Article 81 EC) because of its public policy nature. The ECJ then by analogy concluded its arguments by stating that the nature and importance of the public interest underlying the protection which the Directive confers on consumers also justified that the national court should examine of its own motion whether a contractual term is unfair in light of Directive 93/13. (viii) The ECJ s ruling The ECJ concluded by stating that the Directive 93/13 must be interpreted as meaning that when a national court decides whether or not to set aside an arbitral award it must determine whether the arbitration agreement is void and accordingly set aside the arbitral award where the arbitration agreement contains unfair terms. It must do so even when the consumer has not pleaded its invalidity in the course of the arbitration proceedings but has only reverted to this argument when annulment was under consideration. B. Asturcom v Rodriguez Nogueira Consumer Arbitration in the EU 219 (i) Facts In the case of Asturcom Telecomunicaciones SL v Cristina Rodríguez Nogueira, Ms Rodriguez Nogueira was sued in arbitration proceedings on facts that are 40 Court of Justice Case 126/97, Eco Swiss China Time Ltd v Benetton International NV [1999] ECR I The ECJ refers to this case in para 34.

12 220 Journal of International Dispute Settlement similar to the ones in the previous case. Again, the telephone company initiated arbitration proceedings against Ms Rodríguez Nogueira with the AEADE. The difference from the previous case is that Ms Rodríguez Nogueira did not in any way become involved in the proceedings related to this dispute: she did not participate in the arbitration proceedings, nor did she afterwards file an action for annulment of the arbitral award. It was Asturcom that went before the Spanish judge to request that he order the enforcement of the arbitral award. The Spanish enforcement court found the arbitration clause in the subscription contract to be invalid for several reasons, among which was the inaccessibility of the arbitration proceedings from the consumer s point of view. The Spanish court was faced with a Spanish law that did not contain any provision that explicitly allowed such assessment to be carried out at this stage of the proceedings. The court had doubts as to whether the Spanish arbitration legislation was compatible with what is required under EU law and therefore decided to stay the proceedings and refer the following question to the ECJ for a preliminary ruling. (ii) Preliminary ruling The Spanish court asked the ECJ whether a court hearing an action for enforcement of an arbitral award that was made in the absence of the consumer should with a view to guaranteeing the protection extended to consumers under Directive 93/13 determine of its own motion whether the arbitration agreement is void, and annul the award if it finds that the arbitration agreement contains an unfair arbitration clause that is to the detriment of the consumer. (iii) ECJ s reasoning It seems that the ECJ in the Asturcom case picked up where it left off in the Mostaza decision. The Court reiterated the purpose and importance of the provisions of consumer protection introduced by the Directive 93/13. It again stressed the mandatory nature of Article 6(1) of the Directive and pointed out that the imbalance between the consumer and the seller or supplier may be corrected only by positive action unconnected with the actual parties to the contract. 41 The Court held that in the Mostaza case it had therefore held that the national court is required to assess of its own motion whether a contractual term is unfair. 42 (iv) Distinguishing Mostaza The Court did, however, observe that the case at hand should be distinguished from the Mostaza case. One distinction lay in the fact that Ms Rodríguez 41 Mostaza Claro para Ibid para 32.

13 Consumer Arbitration in the EU 221 Nogueira had not in any way become involved in the various proceedings relating to the dispute between her and Asturcom and had not brought an action for annulment before the national court. Another distinction was that the national court formulating the preliminary question was asked to decide on the enforcement of the arbitral award and did not serve as an annulment judge. Hence, the arbitral award that was sought to be enforced was considered a final decision that had res judicata pursuant to the domestic rules of procedure. (v) Res Judicata The ECJ recognized that the rules implementing the principle of res judicata are a matter of national law and reside under the procedural autonomy of the member states. Consequently, as decided under previous case-law (eg Eco Swiss), Community law does not require a national court to override the national procedural law conferring finality on a decision even if that would allow to remedy an infringement of a provision of Community law. Once again, however, the ECJ also examined whether this domestic procedural principle of res judicata respected the principles of equivalence and effectiveness. (vi) Principle of effectiveness The Court held that the time-limits for filing an annulment action imposed in light of the res judicata principle lived up to the test of effectiveness. The Court applied the procedural rule of reason set out in the Peterbroeck case. 43 (vii) Equivalence and Public policy This time the ECJ relied on the principle of equivalence to call for an exception to the rule of procedural autonomy. It did so following reasoning similar to that in the Mostaza case. The heart of the Court s analysis was the nature and importance of the public interest underlying the protection which Directive 93/ 13 confers on consumers and which satisfies the requirement of Article 3(1)(t) EC, as well as the mandatory nature of Article 6(1) of the Directive. The Court was more explicit than in the Mostaza case. It stated that Article 6 of the Directive must be regarded as a provision of equal standing to national rules which rank, within the domestic legal system, as rules of public policy (emphasis added). According to the ECJ, this means that, insofar as the national enforcement court has a duty or the discretion to assess on its own motion whether the arbitration clause is in conflict with domestic public policy, the court has an obligation to assess whether the clause is in conformity with the requirements of the Directive. The ECJ referred to the cases of van Schijndel and van Veen Court of Justice Case 312/93, Peterbroeck, Van Campenhout & Cie SCS v Belgian State [1995] ECR I Court of Justice Joined Cases 430/93 and 431/93, Jeroen van Schijndel and Johannes Nicolaas Cornelis van Veen v Stichting Pensioenfonds voor Fysiotherapeuten [1995] ECR I-4705.

14 222 Journal of International Dispute Settlement (viii) The ECJ s ruling The answer of the ECJ to the preliminary question was thus that the national court hearing an action for enforcement of a final arbitral award made in the absence of the consumer is obliged to consider all legal and factual elements available to it in order to assess of its own motion whether an arbitration clause in a business-to-consumer ( B2C ) contract is unfair in the light of the Directive 93/13. This obligation is relevant insofar as the national rules of procedure also allow such assessments to be carried out in similar actions of a domestic nature. C. Evaluation of the ECJ s rulings (i) Mostaza and Asturcom in a nutshell The most important information conveyed in both of these judgments is the ECJ s intimation that the rules put forward in the Directive 93/13 (and more specifically the key provisions in Articles 3, 6 and 7) are of such a fundamental nature that they not only deserve treatment equivalent to that afforded to the national rules of public policy, but also justify the obligation of the national courts to assess of their own motion whether a contractual term is unfair, compensating in this way for the imbalance which exists between the consumer and the seller or supplier. 45 (ii) National Courts obligations The ECJ imposed this obligation on national courts dealing with requests for annulment and enforcement of an arbitral award. This resulted in the following concrete rules. Pursuant to the Mostaza ruling, the annulment judge is obliged to assess the validity of an arbitration agreement in light of Directive 93/13. The ECJ already established in the Eco Swiss decision that a national court is required to grant an application for annulment for failure to comply with EU law rules of public policy, where its domestic procedural rules impose a similar obligation to set aside an arbitral award for failure to observe national rules of public policy. In Mostaza, the ECJ added that such an obligation exists even where the consumer has not taken any action to assert his rights during the arbitration proceedings but does so for the first time during the annulment proceedings. In the Asturcom judgment, the ECJ imposed an obligation on the enforcement court to assess on its own motion whether a clause is unfair in light of Article 6 of the Directive. The enforcement court is under such an obligation in the two situations explained in consideration 53 of the judgment. The first situation is when the national enforcement court has a corresponding obligation to assess whether an arbitration clause is in conflict with domestic rules of public policy. 45 Para 38.

15 Consumer Arbitration in the EU 223 This logically follows from the application of the principle of equivalence. Secondly, the ECJ also required such a review when the national courts have no obligation but a possibility to consider whether such an arbitration clause is in conflict with national rules of public policy ( in so far as (...) it can (holding); where (...) it has a discretion (...) 46 ). 47 The Court justified this rather far-reaching rule by referring to its previous rulings in the cases of van Schijndel and van Veen and Kempter. 48 (iii) Nature of consumer law Another important matter in both decisions is the classification of the Directive 93/13 and more specifically of its Article 6. In the Mostaza case, the ECJ considered Article 6 of the Directive to be mandatory. Yet the ECJ nowhere explicitly defined the European consumer protection rules in terms of public policy. The Court simply connected the Directive s objective with Article 3 EC thereby indicating its fundamental value; the Court also highlighted the analogy with the Eco Swiss decision and furthermore based part of its reasoning on the principle of equivalence by illustrating the similarities between European law and national public policy rules. The ECJ seemed merely to have referred to the principle of equivalence to enforce its own arguments and to take the edge off the arguments of Móvil and the German government. The effective application of the fundamental provisions of consumer law alone seemed sufficient to order the national courts to review their application. In the Asturcom decision, however, the Court explicitly referred to Article 6 of the Directive as a provision with equal standing to national rules which rank, within the domestic legal system, as rules of public policy. 49 (iv) A logical continuation...? Both decisions are logically aligned with preceding case-law. The ECJ in the above-mentioned rulings appears to have built on previous judgments (eg Eco Swiss) regarding the enforcement of European public policy. Also, the Mostaza and the Asturcom rulings prima facie do not add significantly to the obligations previously imposed upon national courts by domestic procedural laws. National laws already provided adequate safety valves to protect not only the parties in the arbitration but even more so society from being denied the rules of public policy. Such guarantees are foreseen in various domestic legal 46 Para In its answer to the preliminary question the Court phrased this by stating that the national court can carry out such an assessment in similar actions of a domestic nature, which seems to be a rather unfortunate choice of words given the manifold significance of the term action in this context. 48 Court of Justice Case C-2/06, Willy Kempter KG v Hauptzollamt Hamburg-Jonas [2008] ECR I Asturcom para 52.

16 224 Journal of International Dispute Settlement provisions on the enforcement and annulment of arbitral awards according to which courts are under a duty sua sponte to raise issues of public policy. 50 It is true that by framing its ruling under the heading of public policy, the ECJ s holding in both cases at least to the letter of the law neither considerably altered the current arbitration practice of the member states nor added much to the current stance of European law on this matter. The question is, however, whether the ECJ adopted the most appropriate (and intellectually honest) position by cloaking its ruling in public policy pretensions. The noble objective of consumer protection and the ponderous argument of public policy with which the ECJ authoritatively underpinned both rulings could be fundamentally misleading. (v) A roundabout route...? It would have been more legitimate for the ECJ to rely on the two matters that truly were at the basis and constituted the spirit of both preliminary references, namely the validity of the arbitration agreement and the right to due process. The national courts in both Mostaza and Asturcom were asked to adjudicate upon the validity of a standard arbitration clause in light of the requirements of fairness provided for in the Directive 93/13. Such assessment was part of the courts decisions on whether the arbitral award should be set aside or could be enforced against the consumer. The objective of Articles 3 and 6 of Directive 93/13 is to avoid that the (economically weaker) consumer is bound by an unfair term that would have him forego certain rights and obligations, thereby placing him in a significantly inferior position vis-à-vis the (stronger) seller. What is particularly important here is the example given in Article 1(q) of the Annex to the Directive which considers a term to be unfair when it excludes or hinders the consumer s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions. This provision protects a consumer s fundamental right to a fair trial. At the basis of the preliminary questions at hand were these concerns for the protection of the consumer s due process of law and fair access to justice and the related issue of the validity of the arbitration agreement. Therefore, the ECJ could have followed the propositions made by both Advocate General Tizzano in the Mostaza case and Advocate General Trstenjak in the Asturcom case to simply approach the issues at hand from a due process perspective. Advocate General Tizzano pointed out that it is widely agreed that the right to be heard can be labeled as part of the concept of Community public policy. 51 Advocate General Trstenjak pressed a similar claim by quoting 50 J.F. Poudret and S. Besson, Comparative Law of International Arbitration (Sweet & Maxwell, London 2007) and Opinion of Advocate General Tizzano, delivered 27 April 2006, Case C-168/05 [2006] ECR I-1042 para 60.