Briefing Paper on the Proposed Consumer Rights Directive: Consumer Rights concerning Contract Terms Chapter V

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3 DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY Briefing Paper on the Proposed Consumer Rights Directive: Consumer Rights concerning Contract Terms Chapter V Abstract: The paper examines Chapter V (consumer rights concerning contract terms) of the proposed Directive on Consumer Rights. What will be the actual impact of a fully harmonised general clause on the Member States substantive law? What should such a general clause look like? Would a general clause create an overload of work for the Court of Justice? The briefing paper focuses on the national law of the following Member States: Germany, France, UK, Poland, Denmark, Cyprus, Portugal, Romania. IP/A/IMCO/NT/ October 2010 PE EN

4 This document was requested by the European Parliament's Committee on Internal Market and Consumer Protection (IMCO). STUDY TEAM Prof. Dr. Nils Jansen Prof. Dr. Reiner Schulze Prof. Dr. Carole Aubert de Vincelles TRANS EUROPE EXPERTS (TEE) 12, Place du Panthéon Paris, France RESPONSIBLE ADMINISTRATOR Ms. Elke Ballon Policy Department Economic and Scientific Policy European Parliament B-1047 Brussels LINGUISTIC VERSIONS Original: [EN] Translation: [DE, FR] ABOUT THE EDITOR To contact the Policy Department or to subscribe to its monthly newsletter please write to: Manuscript completed in October Brussels, European Parliament, This document is available on the Internet at: DISCLAIMER The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy. IP/A/IMCO/ST/ PE

5 Table of Contents I. Background and question... 1 II. Executive Summary... 2 III. General consequences of full harmonisation within Chapter V Preliminary considerations Legislative options Consequences of the full harmonisation on the scope of Chapter V (Art. 30 Proposal) The contracting parties Individually negotiated terms Terms reflecting mandatory statutory or regulatory provisions Terms concerning the contract s subject matter and price The unfairness test Legislative and judicial lists Art. 32 Proposal and the general unfairness test Individual circumstances Transparency of contract terms, Art. 31 Proposal IV. Consequences for the work of the Court of Justice of the European...24 Union (CJEU) The scope of full harmonisation The interpretation of the unfairness test The present role of the CJEU... U The future role of the CJEU under a full harmonisation of Chapter V Some results V. Proposals and drafting recommendations Proposals and drafting recommendations concerning the level of harmonisation Proposal and drafting recommendation concerning the unfair terms control in B2B contracts Annex I Graphs...33 Annex II Questionnaire for National Reporters...37 Annex III National Reports...41 IP/A/IMCO/NT/ PE

6 List of abbreviations (D)CFR (Draft) Common Frame of Reference CJEU Court of Justice of the European Union PECL Principles of European Contract Law TEC Treaty on the European Community TFEU Treaty on the Functioning of the European Union IP/A/IMCO/NT/ PE

7 I. Background and question The Parliament asks the following questions: The provisions of Directive 93/13/EEC (unfair contract terms) are updated in Chapter V of the European Commission s proposal for a Directive on Consumer Rights. The proposal applies to unfair contract terms which have not been individually negotiated, such as standard contract terms. Unfair terms are those creating significant imbalances in the rights and obligations of consumers and of traders and are not binding to consumers. In order to ensure legal certainty, the Directive contains two lists of unfair terms. Annex II contains a list of terms which in all circumstances are considered unfair. Annex III contains a list of terms which are deemed unfair unless the trader proves otherwise. These same lists apply to all Member States and may only be amended by the comitology procedure provided for by the Directive. Here, the briefing paper will answer the following questions: Which will be the actual impact of a fully harmonised general clause on the Member States substantive law? How should such a general clause look like? Would a general clause create an overload of work for the CJEU? The briefing paper s focus is on the national laws of Germany, France, UK, Poland, Denmark, Cyprus, Portugal, and Romania. The question specifically relates to the general unfairness test in Art. 32 (1) and (2) of the Proposal. Aspects of unfair terms control not specifically relating to the unfairness test have not been analysed in more detail within the scope of this briefing paper. However, the unfairness test is inseparably connected with other aspects of Chapter V, especially the grey and black lists (Art. 32 (1) Proposal), the transparency test (Art. 32 (3)) and the scope of Chapter V (Art. 4 Proposal concerning the scope of the Directive as a whole, Art. 30). These additional aspects are included into the present analysis, therefore, as far as they are relevant for a complete answer to the questions. IP/A/IMCO/NT/ PE

8 II. Executive Summary Different levels of harmonisation can be proposed depending on the margin of manoeuvre for Member States and on how unfairness term control is to be linked with national general contract law: (1) Substantial full harmonisation of unfair terms control enables traders to use uniform standard terms all over the European Union. This option cannot be recommended. Basic arguments: Substantial full harmonisation would unavoidably have an extreme impact on all Member States substantive contract law and requires exceptionally farreaching changes of and additions to the present Chapter V. Large parts of the Member States contract laws would have to be replaced by European rules as far as standard terms are concerned. Hence, the CJEU would have to be entrusted with the development of contract law. In its present form it could probably not be able to bear the resulting additional workload. (2) Weaker, more formal forms of full harmonisation of unfair terms control. This option cannot be recommended. Basic arguments: The basic idea of this model is to apply the concept of full harmonisation to the wording of the unfairness test while at the same time allowing for a different substantial interpretation of this test by national courts. The actual effects of this model do not significantly differ from the present state of minimum harmonisation. At the same time, such a model could not work in legal practice as it would lead to contradiction, misunderstanding and unavoidably gives rise to legal dispute. This is not primarily a technical problem; rather an unequal treatment of citizens would unavoidably be a consequence. (3) Targeted full harmonisation, limited to some aspects of Chapter V other than the fairness test (such as the transparency test, interpretation, and enforcement). This option is probably valid; it can only be recommended as a second best option, however. Basic arguments: This model is probably workable; however, it causes unnecessary complexity without actually helping traders or consumers utilise the benefits of the Internal Market. (4) Minimum harmonisation (recommended) Basic arguments: See above (1) (3). (5) Any form of full harmonisation of unfair terms control in consumer contracts cannot prevent Member States from extending such protection to legal persons who are not consumers (scope of protection). Basic arguments: This proposition is independent of the other questions of full harmonisation of unfair terms control. It is based on the fact that the EU does not have the legal competence to legislate outside the scope of consumer protection. It should therefore be clarified 1 in the Proposal that full harmonisation of unfair terms control shall not prevent Member States from extending such protection to legal persons which are not consumers (scope of protection). 1 Apparently, this is already provided for by Art. 3 (1) Proposal. As there is still misunderstanding among European lawyers, a clarification in Art. 4 or in the Recitals is probably helpful. IP/A/IMCO/NT/ PE

9 III. General consequences of full harmonisation within Chapter V 1. Preliminary considerations Full harmonisation prevents Member States from introducing a different level of protection, higher or lower, for consumers. This prohibition concerns not only the transposed rules, but also existing national rules (rent, sale, etc.) with a wider scope than the directive, which might be in competition with some directive s rules. Full harmonisation prevents Members States from applying such rules within the directive s scope. 2 It thus aims at a substantial harmonisation of the Member States actual law in practice, i.e. of the legal rules as they are actually applied. Hence it goes beyond a more formal, narrow harmonisation of the European legal language. Of course, from a political and economic point of view, full harmonisation of the control of unfair terms seems to be highly desirable: 3 Only fully harmonised rules would allow traders to use uniform standard terms within the EU; and only fully harmonised rules would make it possible for consumers, contracting within the EU, to rely on similar standards of contractual fairness independently of where the trader they contract with is from. If rules are not fully harmonised, traders need different standard terms and hence specific legal advice for each individual country, in which they offer their goods or services. As it appears, this often becomes a huge obstacle, especially for small and medium-sized enterprises. Likewise, consumers can never be sure that foreign standard terms meet their expectations of contractual fairness. It is not surprising, therefore, that the public consultation process leading to the revision of the consumer acquis showed a desire among both Member States and economic actors for uniform rules on unfair terms control. 4 From an economic perspective, binding European standards and uniform lists of specific prohibitions ( black and grey lists) seem desirable. On the other hand, however, a substantial full harmonisation of unfair contract terms allowing traders to use one single set of contract terms within the EU is particularly difficult and expensive to achieve as long as substantial divergences in national contract laws exist. An example is a contract term providing that the consumer may only return the defective product after he has first given the seller a period of three days in which to repair the product. This particular contract term would not be unfair if the national law generally permits the return of a defective product after a reasonable period of time for repair has been given (such as in Germany, cf. Art. 3 (3) Directive 1999/44/EC as minimum harmonisation). However, the same contract term would be a great disadvantage, and hence would be viewed as unfair, if the national contract law entitles the consumer to return the defective product immediately (as in the United Kingdom). 2 For recent examples in the context of the Unfair Commercial Practices Directive 2005/29/EC, see CJEU, 23 April 2009, Joined Cases C-261/07 and C-299/07, VTB-VAB NV and Galatea BVBA; CJEU, 11 March 2010, C- 522/08, Telekomunicaja Polska SA w Waeszawie./. Prezes Urzędu Kommunimacji Elektronicznej (Belgium s and Poland s laws on joint tender procedures have to be eliminated); CJEU, 14 January 2010, C-304/08, Zentrale zur Bekämpfung unlauteren Wettbewerbs ev./.plus Warenhandelsgesellschaft mbh (on German rules on gambling). 3 E.-M. Kieninger, Die Vollharmonisierung des Rechts der Allgemeinen Geschäftsbedingungen eine Utopie?, (2009) 73 Rabels Zeitschrift für ausländisches und internationales Privatrecht, , 794 f. 4 European Commission, Commission Staff Working Paper. Report on the Outcome of the Public Consultation on the Green Paper on the Review of the Consumer Acquis ( 18 f. (question D2). IP/A/IMCO/NT/ PE

10 It could thus be problematic if full harmonisation of unfair terms control were to lead to a uniform assessment of such cases. With regard to the aforementioned example, the consequence would be a consistent application of the term in both the United Kingdom and Germany, even though the consumer in one country would be disadvantaged, whereas the other would not be. Whether such cases will in fact arise, can only be precisely evaluated when one considers the exact form of the full harmonisation (cf. the different models below III.2) including the question of the extent to which the CJEU within the scope of the full harmonisation shall interpret the general clause uniformly, or whether the interpretation shall depend upon the different national laws. It should be noted that even a substantial full harmonisation of contract law will not make it possible for traders always to use a standard set of contract terms throughout the European Union. The reason is that standard terms often also pertain to property law and security rights law (an example is terms providing for retention of title or property). Such terms cannot be drawn without taking the rules of property law into account; these cannot be harmonised, however, at the present stage of legal development; as to the present day, no such proposals have been made. 2. Legislative options In view of these problems, the impact of a fully harmonised general unfairness test on the Member States substantive laws and on the CJEU s work-load shall be analysed in this paper on the basis of different models, or options, representing different conceptions of harmonisation: (1)Complete (substantial) full harmonisation This model is guided by the aim of making it possible to use uniform standard terms within the European Union. In particular, this entails: Conclusive black and grey lists: The Member States legislators and courts (see below III.4.1) are prevented from completing the black and grey lists with further prohibitions on contract terms which are not individually negotiated. The interpretation and the control of the application of these lists will ultimately have to be administered by the CJEU. Full harmonisation of the unfairness test: The unfairness test will be applied in a uniform manner, also. This probably makes it necessary to rely on a uniform standard of contractual justice that may be found in the future CFR or another comparable instrument. In any event, the application of the unfairness test will ultimately have to be controlled by the CJEU. Full harmonisation also of the provisions excluding unfair price control and control of terms describing the contract s main subject: The Member States rules on excessive benefits or unfair advantage (see Art. 4:109 PECL) will be barred by the Proposal. This would probably make it necessary to include into the future Consumer Rights Directive a rule dealing with such excessive benefits. Full harmonisation also of other measures: Contract terms within the scope of Chapter V must not be invalidated on the basis of other domestic rules. Thus, contract terms must not be invalidated e.g. on the basis of the Member States o general mandatory prohibitions on specific terms, o rules on illegality and on the ordre public / boni mores, IP/A/IMCO/NT/ PE

11 o rules on good faith, and o rules on vitiated consent as far as the future Consumer Rights Directive regards individual factors vitiating the consumer s consent as relevant for assessing the fairness of a contract term (see below III.4.3). Full harmonisation of non-mandatory contract law: The Member States non-mandatory contract laws will be harmonised with the Proposal s grey and black lists. The necessity of this far-reaching measure becomes apparent from the example given above (III.1). If the Member States contract laws would not conform to the grey and black lists, traders would have strong incentives to rely on such provisions rather than including similar terms into a contract form (where they would be of no effect). Hence, consumers could not rely on not being confronted with such terms. Note: It appears clear that such a model makes it necessary to revise the Proposal substantially and to include, in the black list, provisions that are specifically prohibited in most legal systems, such as the German rule invalidating terms that exclude liability for intentionally inflicted harm ( 276 (3) Bürgerliches Gesetzbuch; cf., more detailed, below III.4 at (2)). At the same time, it must be clear that such a model can only be acceptable for many Member States if it guarantees a sufficiently high level of consumer protection. An alternative might be a similar model, whereby the unfairness test would be fully harmonised, whilst leaving domestic rules of mandatory law untouched as long as they do not specifically apply to contract terms within the scope of Chapter V of the Proposal and as long as they do not specifically protect consumers. Hence, Member States could, for example, provide for some price control (cf. Art. 4:109 PECL). This model would, however, not make it possible for traders to use one set of standard terms throughout the European Union. Nevertheless, it would lead to a higher degree of harmonisation. Furthermore, Member States could be required to produce a complete list of the relevant provisions of general contract law. Such legislative information would make it easier for traders to adapt their standards to a specific legal system. At the same time, these lists would make clear the discrepancies between the Member States different contract laws. (2)More formal, weak forms of full harmonisation This model is guided by the aim of applying the concept of full harmonisation to the general unfairness test, while at the same time avoiding the problems of substantial full harmonisation (above (1)). This model does not lead to a substantial harmonisation of European consumer law. In particular, full harmonisation applies to: The wording of the unfairness test: Member States are obliged to transform the directive by using its precise wording for the unfairness test. The transparency test (Art. 31 of the Proposal). The interpretation of terms (Art. 36 Proposal). The effects (Art. 37 Proposal). The principle of minimum harmonisation applies to: Certain elements of the unfairness test such as the requirement of taking circumstances attending the conclusion of the contract (Art. 4 (1) Unfair Terms Directive, Art. 32 (2) Proposal) into account. The black and grey lists: IP/A/IMCO/NT/ PE

12 A full harmonisation of the grey and black lists is only possible as far as the general fairness test is substantially harmonised (below III.4.2). It follows that is not a feasible option to prevent the Member States from adding further terms to the lists by additional requirements. An example of such a vain attempt of finding a middle way between full and minimum harmonisation would be the requirement that the terms added must be essential in order to protect consumers appropriately, or that they are proportionate and effective (below III.4.1). The scope of unfairness-control: o Control not only of standard terms, but also of other terms that are not individually negotiated; no control of individually negotiated contract terms; rules concerning the burden of proof in this respect; see Art. 30 Proposal. o The exclusion of a control of the main subject of the contract and of the adequacy of the price of goods or remuneration for the services (see below III.3.4). The crucial point of this model is that the substance and hence the application of the unfairness test would not be harmonised. Thus, the present state of law, according to which the unfairness control is entrusted to the Member States (Freiburger Kommunalbauten GmbH./. Ludger Hofstetter et al.), 5 would be preserved. Note: From a technical, legal point of view, this is the worst of all options discussed in the present briefing paper. Using a fundamental legal concept, such as full harmonisation with grossly divergent meanings (formal vs substantial full harmonisation), will lead to contradiction, misunderstanding and unavoidably gives rise to legal dispute. As a result, it will be difficult to avoid unequal treatment of citizens. In fact, the CJEU must be confused, where the concept of full harmonisation is taken to mean that the application of rules shall be left to the Member States. Furthermore, it will become difficult even to understand and describe the differences between the Member States laws as the different substantial rules and tests are described with the same terminology. At the same time, such a model will have no practical effects concerning the Internal Market. Hence, it has no advantages: it helps neither traders nor consumers as no uniform set of rules can be used. (3) Targeted full harmonisation This model fully abandons the aim of making it possible to use uniform standard terms within the European Union. Rather, (full) harmonisation is confined to those aspects where it can be achieved without seriously interfering with the Member States legal systems and without imposing a heavy additional workload on the CJEU. Thus, in accordance with the CJEU s jurisprudence concerning the existing Unfair Terms Directive, 6 the interpretation and application of the unfairness test shall not be harmonised. Member States remain free, in principle, to add further prohibitions to the grey and black lists. In particular, full harmonisation does not apply to domestic rules of mandatory law, non-mandatory contract law, price control, the unfairness test, and the black and grey lists. Here, the Member States legislators will not be prevented from completing these lists with further prohibitions on contract terms which are not individually negotiated (see also below III.4.1). 5 CJEU, 1 April 2004, C-237/02; see below at nn. 21 ff. 6 See below, at nn. 21 ff. IP/A/IMCO/NT/ PE

13 Full harmonisation is limited to questions such as the transparency test (Art. 31 of the Proposal), interpretation of terms (Art. 36 Proposal), effects (Art. 37 Proposal). The principle of minimum harmonisation applies to: Certain elements of the unfairness test, such as the requirement of taking circumstances attending the conclusion of the contract (Art. 4 (1) Unfair Terms Directive, Art. 32 (2) Proposal) into account. The black and grey lists. The scope of unfairness-control: o Control not only of standard terms, but also of other terms that are not individually negotiated; no control of individually negotiated contract terms; rules concerning the burden of proof in this respect; see Art. 30 Proposal. o The exclusion of a control of the main subject of the contract and of the adequacy of the price of goods or remuneration for the services (below III.3.4). Note: In this model no harmonisation will be established with regard to the general fairness test. Only some minimum requirements can be harmonised. The reason for this restriction in the approach consists of the fact that (a) even minimum harmonisation presupposes a common conception of contractual fairness and that (b) even minimum harmonisation will lead to a substantial increase of the CJEU s workload. As a result the black and grey lists cannot be included into the field of targeted full harmonisation; rather the standard will remain as minimum harmonisation. The reason for this restriction consists of the fact that it is simply not possible to entrust the application of the general fairness test to national courts while at the same time designing fully harmonised lists of unfair terms (see below III.4.2). Moreover, wrong legislative incentives for Member States are set if the lists are included into the ambit of full harmonisation: National Parliaments could be inclined to reformulate former prohibitions on terms that have not been individually negotiated, in the form of general prohibitions. Such an extension of mandatory contract law would not violate the proposed Directive as, under such an approach, the general rules of contract law cannot be included within the ambit of full harmonisation. Accordingly, it might result in even larger differences between the Member States legal systems. This model of targeted harmonisation of unfair terms control can be attractive, if the concept of full harmonisation is seen, perhaps for reasons of political symbolism, as a politically desirable aim in itself. Materially, however, this model does not lead to much further harmonisation of unfair contract terms control. Clearly, traders could not use one set of standard terms in different countries. Likewise, consumers could not rely on similar standards applying everywhere in Europe. Nevertheless, this model may be understood as a middle way between substantial full harmonisation and minimum harmonisation and therefore appears attractive. (4) Minimum harmonisation This model abandons the aim of making it possible to use uniform standard terms within the European Union. In comparison with the present state of law, this model nevertheless significantly increases the level of harmonisation by applying the principle of minimum harmonisation to the grey and black lists (rather than taking them as merely indicative ). Yet, at the same time the model avoids the complexities of models (2) and (3). IP/A/IMCO/NT/ PE

14 Thus, in accordance with the CJEU s jurisprudence concerning the existing Unfair Terms Directive, the interpretation and application of the unfairness test shall not be harmonised. Member States remain free, in principle, to add further prohibitions to the grey and black lists. In contrast to the present state of law, these lists are binding as minimum standards. The principle of minimum harmonisation applies to: Certain elements of the unfairness test, such as the requirement of taking circumstances attending the conclusion of the contract (Art. 4 (1) Unfair Terms Directive, Art. 32 (2) Proposal) into account. The black and grey lists. The scope of unfairness-control: o Control not only of standard terms, but also of other terms that are not individually negotiated; no control of individually negotiated contract terms; rules concerning the burden of proof in this respect; see Art. 30 Proposal. o The exclusion of a control of the main subject of the contract and of the adequacy of the price of goods or remuneration for the services (below III.3.4). 3. Consequences of the full harmonisation on the scope of Chapter V (Art. 30 Proposal) Full harmonisation can only be effective within the scope of Chapter V; hence it is essential that boundaries to the scope are drawn clearly. Here, four factors determine the scope of Chapter V: - the status of the contracting parties (traders and consumers) (below 3.1), - the exclusion of individually negotiated terms (Art. 30 (1) and (2) Proposal; below 3.2), - the exclusion of contract terms reflecting mandatory statutory or regulatory provisions, which comply with Community law and the provisions or principles of international conventions to which the Community or the Member States are party (Art. 30 (3) Proposal; below 3.3), and - the exclusion of terms concerning the subject matter and price (Art. 32 (3) Proposal; below 3.4) The contracting parties The notion of consumer goes well beyond Chapter V and concerns the Proposal as a whole. Yet, even if the European Parliament has requested a separate briefing paper on the definitions in the Proposal, the boundaries of the notion of a consumer are essential in the present context as the Member States exhibit huge differences in this respect. In the same way as in 1993, the Proposal limits the regime of unfair terms control to B2C contracts only. This limitation is based on the fact that European legislation seeks to protect consumers within the Internal Market in order to reconcile a high level of protection with the competitiveness of enterprises (Rec. 4). Nevertheless, a number of Member States apply the general clause to persons other than consumers under Art. 2 (b) Unfair Terms Directive and Art. 2 (1) of the Proposal. These extensions to the scope of application of the general clause (Art. 32 of the Proposal) are based upon different concep- 7 At present, this problem is conceptually not a matter of scope. However, it concerns the same set of questions, namely the range of application of the unfairness test. IP/A/IMCO/NT/ PE

15 tions of unfair terms control and display considerable variations. It follows that the consequences of full harmonisation would also be different for the Member States. The restriction of the consumer to natural persons in Art. 2 (1) of the Proposal would be problematic for a number of Member States. For example, France also protects non-professionals when these are legal persons; however, Romania includes certain collective entities (associations), but not legal persons, although the Constitutional Court considers this to be a legislative omission (decision no of 16 October 2008). Furthermore, France (and similarly Poland, also) also applies the provision, which corresponds to the general clause, in its national legislation to a professional party, legal or natural person, where there is no direct link between their professional activity and the contract containing the litigious term (Cass. civ. 1ère, 24 January 1995, Bull. civ. I, n 54). Moreover, French legislation has recently established a specific unfairness term control similar to the consumer protection for professionals. 8 Based upon an overarching model of general conditions of business, the unfairness test in the general clause is applied, in German and Portuguese law, to all types of non-individually negotiated contracts regardless of whether the parties to the contract are a business or consumer (however, modifications do exist depending on whether the contract is a B2B or B2C contract). It must be thus be clarified, whether Member States shall, also in the future, be free to apply the unfairness term control (or an equivalent protection on the basis of other instruments) to parties not defined as a consumer by Art. 2 (1) of the Proposal (legal persons, professionals). Even if a few decisions CJEU concern related problems, there is no explicit statement in this respect. In its 22 November 2001 Cape case, the Court only specified that if a Member State transposes, without extension, the restrictive definition of the Unfair Terms Directive, it cannot, then, extend it to other persons by way of interpretation. 9 By contrast, the Court had not had to rule on the possibility for a Member State to extend in its legislation the notion of consumer in order to include other categories of persons. As the Advocate General states it in his opinion, this issue goes beyond the scope of the present action since the the question asked by the national court relates to the term consumer used in Article 2 (c) of the Directive. By contrast, there is no indication that, in order to be able to dispose of the main proceedings, that court should be informed of the circumstances in which Member States may, where necessary, extend the protection provided by the Directive to persons other than consumers, such as legal persons or traders. 10 In view of this, Member States should be free to extend the unfair terms control to persons not protected under the Unfair Terms Directive. Two main arguments support this view. As a matter of principle of European law, full harmonisation shall not have an impact outside of the scope of the directive as defined by the notions of consumers and traders. However, in view of the fact that the CJEU assumes that directives may have an influence even outside their scopes, as national laws must not conflict with a directive s objectives, this should be expressed more clearly. 8 Art. L 442-6, I, 2 Commercial Code: Any producer, seller, supplier, manufacturer or person registered at the Trade Directory (personne immatriculée au repertoire des metiers) who subjects or tries to subject a contracting party to obligations creating a significant imbalance in the parties rights and obligations is liable for damages. 9 In its judgment of 22 November 2001, the CJEU ruled that the term consumer in the Unfair Terms Directive should be interpreted as referring solely to natural persons. Here, Italy had repeated, verbatim, this Directive s definition of consumers without extending its scope and then asked the CJEU about how to interpret the Directive s text: CJEU, 22 November 2001, Joined Cases C-541/99 and C-542/99, Cape Snc and Idealservice MN RE Sas Idealservice Srl. 10 Opinion of Advocate General Misho, [19] f. IP/A/IMCO/NT/ PE

16 The question of a control of unfair terms outside the scope of Chapter V in B2B contracts and similar situations is clearly outside the European Union s legislative competence. Indeed, the Proposal s limitation to B2C contracts is based on Art. 95 TEC (Art. 114 TFEU). Preventing Member States from extending the unfairness term control to business contracts would amount to European legislation on general contract law. Yet, there is no such legislative competence. 3.2 Individually negotiated terms The core issue here is whether to prevent the Member States from applying the rules on unfair terms control to individually negotiated terms. Under present European law, there can be no doubt that Member States are free in this respect (see Unfair Terms Directive, Art. 3 and Rec. 12). Nevertheless, several Member States, following this Directive s approach, stipulate that the unfairness term control is not applicable to individually negotiated terms (Germany, Poland, Portugal and the United Kingdom). However, several other Member States have extended the protection to individually negotiated terms. Thus in Denmark and France, both individually negotiated and non-negotiated terms are, in principle, covered. In Cyprus, both negotiated and non-negotiated terms are covered by the Cypriot unfair terms legislation if the overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract. In Romania, the Act implementing the Unfair Terms Directive only refers to non-individually negotiated terms. However, it has not yet been clarified by Romanian jurisprudence and doctrine whether this has been changed by the new Civil Code (enacted in July 2009). In the event that a full harmonisation of the general clause restricts the application of this clause to non-individually negotiated terms, some Member States (such as Denmark, France and Cyprus) will thus have to change their existing legislation and abolish the unfairness test for individually negotiated terms in B2C contracts. This situation will entail a lower protection for their consumers. Moreover, if this test, as according to current legislation, is also applicable to B2B contracts (as in Denmark) then the problem arises that, in the future, it is no longer consumers who may be protected by this instrument, but only other parties to a contract. The problematic consequence of such a state of law would be that the protection of consumers must be lower than the protection of business. Furthermore, the impact of such full harmonisation would strongly differ between different Member States, and it would be difficult, if not impossible, to determine the exact extent of such prohibition. Indeed, such full harmonisation would not be possible without at the same time providing for additional rules relating to the control of individually negotiated terms. This is the case as all Member States have established means of controlling terms independently of whether they are individually negotiated or not (examples are the notions of undue influence, illegality, good faith, etc.; see above III.4 at (2)). According to the choices made by Member States when transposing the Unfair Terms Directive, these rules can either be found in general contract law (for example in Germany) or they are based on an extension of the general unfairness test (France and Denmark). It follows that full harmonisation in this respect would leave German law largely intact (hence a high level of protection in this respect would be preserved), whereas it would have a huge impact on Danish and French law (here, nearly all protection against unfair terms that are individually negotiated would be taken away). Thus, if the proposed Consumer Rights Directive prevents national Member States from applying the unfairness test of the general clause (Art. 32) to individually negotiated terms, some Member States laws will be changed to an important extent. Most of them will have to adapt their IP/A/IMCO/NT/ PE

17 general contract law to allow for that kind of control. In effect, European law will continue to be divergent in this respect. Therefore, it must be concluded, that (1)the proposed Consumer Rights Directive must not prevent Member States from controlling the unfairness of individually negotiated terms as long as the later European directive does not include a full set of rules concerning the control of such terms. At present, it is not clear whether the Proposal prevents Member States from such an extension. Indeed, two contradictory interpretations of the relevant provisions (Art. 30, Rec. 45) are possible. Of course, Art. 30 Proposal may be read as under the Unfair Terms Directive as determining the scope of the provisions of Chapter V. Individually negotiated terms would then remain outside the harmonised scope. Doubts, however, remain, as according to the CJEU s jurisprudence directives may have effect even outside their scope. These doubts are confirmed by Rec. 45 stating that The rules on unfair terms should not apply to terms which the consumer agreed upon following a negotiation. This may be read as a clear statement including individually negotiated terms into the scope of Chapter V and excluding the application of the general unfairness test to such terms. Such uncertainty with regard to the central question of scope of Chapter V is unacceptable. Hence, (2)the scope of the Consumer Rights Directive must be clearly drafted: there must be no doubt as to the European Parliament s decision about whether Member States shall be free to extend the scope of the unfairness test to individually negotiated terms. 3.3 Terms reflecting mandatory statutory or regulatory provisions According to Art. 30 (3) Proposal, terms reflecting mandatory statutory or regulatory provisions, which comply with Community law and the provisions or principles of international conventions to which the Community or the Member States are party are excluded from the general unfairness test. Hence, as for the individually negotiated terms, the core issue is whether to prevent the Member States from applying the rules on unfair terms control to terms reflecting mandatory statutory or regulatory provisions. Although if the Unfair Terms Directive provides for the same exclusion, it is clear that, under this Directive, these terms determine its scope (Art. 1 (2)) 11 and that therefore Member States are free to include or not these terms in the consumer protection. Even if the majority of Member States followed the recommendation of the Unfair Terms Directive in excluding the application of the unfairness test to such terms, the provision was transposed differently in a number of Member States. This is especially true for France: Following the decision of the Conseil d Etat (11 July 2001, req. n Société des eaux du Nord), the administrative judge has to apply the unfair terms legislation to statutory terms. French law is thus more protective than the Commission s Proposal in this matter. Several other Member States also restrict the exclusion of contract terms reflecting mandatory statutory or regulatory provisions as far as certain contracts with public supply services such as energy and telecommunications etc. are concerned (e.g. Poland; and in part Romania through case law). 11 The contractual terms which reflect mandatory statutory or regulatory provisions and the provisions or principles of international conventions to which the Member States or the Community are party, particularly in the transport area, shall not be subject to the provisions of this Directive. See also recital 13: it does not appear to be necessary to subject the terms which reflect mandatory statutory or regulatory provisions and the principles or provisions of international conventions to which the Member States or the Community are party. IP/A/IMCO/NT/ PE

18 The wording of Art. 30 (3) of the Proposal, however, is different and seems to prevent Member States from applying Chapter V to terms reflecting regulatory provisions. 12 Therefore, full harmonisation of that Proposal will forbid Member States from extending Chapter V to such terms. If full harmonisation were to lead to the total exclusion of the application of the unfairness test in the general clause to contract terms reflecting mandatory statutory or regulatory provisions, a number of Member States would have to change their national law, above all with regard to public supply services. In this case, intensive consideration would be necessary with respect to the other legal instruments that could fall under the protection of the general clause. It follows, therefore, (1)that the European Parliament should be aware of these consequences and might choose rather to opt for minimum harmonisation in this respect. Moreover, wording issues arise. The concept of regulatory provisions should be included into the list of definitions in Art. 2 Proposal. At present, different legal systems follow different approaches as to the regulation of public contracts, especially contracts concluded by the State, by a local administration, or by a public firm. The types of legislation intended by this provision must therefore be clearly defined. It is difficult to understand what is meant by the reference to the compliance with Community law. Of course, the unfairness control cannot apply to Community law, i.e. to provisions transposed from directives or regulations. However, it is unclear what this entails for national rules not complying with Community law, i.e. for rules that violate Community law or for which there is no Community law. It follows that (2)the exact scope of this exclusion should be clearly reflected and more precisely drafted. 3.4 Terms concerning the contract s subject matter and price Similarly to Art. 4 (2) of the Unfair Terms Directive, Art. 32 (3) of the Proposal exempts terms concerning the contract s subject matter and price from the application of the unfairness test. At the same time, Art. 31 Proposal applies an aspect of the unfairness test especially to such terms. The Proposal does not make fully clear whether a full harmonisation of Art. 32 (3) would oblige the Member States to transpose this exception into its national law. Even if the Proposal does not conceptually conceive of this question as a matter of scope, the underlying problem relates to the same set of questions, namely to the range of application of the unfairness test. This is a matter of scope of full harmonisation within Chapter V. At present, there is no obligation to transpose this exception into national law as the Member States may also subject the subject matter of the contract and the adequacy of the price and remuneration to the unfairness test. 13 Indeed, the CJEU recently confirmed that, according to the currently applicable Unfair Terms Directive, [n]ational legislation may authorise judicial review as to the unfairness of contractual terms which are drafted 12 This chapter shall not apply to contract terms reflecting mandatory statutory or regulatory provisions... See also recital 46: Provisions on unfair contract terms should not apply to contract terms, which directly or indirectly reflect mandatory statutory or regulatory provisions of the Member States which comply with Community law. 13 See questions 5 and 6 of the questionnaire (Annex II). IP/A/IMCO/NT/ PE

19 in plain, intelligible language. 14 As the responses from the correspondents show, the exclusion of the unfairness test under Art. 4 (2) Unfair Terms Directive has been transposed into the national law of some Member States (Cyprus, France; Germany; Poland; United Kingdom), whereas other Member States (Denmark; Portugal; Romania) generally extend the unfairness test to the main subject matter of the contract and the adequacy of the price and remuneration. It follows that full harmonisation of this exception would have a wide-reaching impact on the law of the latter Member States. It would considerably lower the level of consumer protection in these Member States. Furthermore, the impact of such full harmonisation would strongly differ between different Member States, and it would be difficult, if not impossible, to determine the exact extent of such prohibition. Indeed, such full harmonisation would not be possible without at the same time providing for additional rules relating to the control of price terms. This is so because nearly all Member States have established means of controlling such terms (see above III.4 at (2)). 15 Several Member States have rules that correspond, to a certain extent, to the control envisaged by Art. 4:109 PECL regarding excessive benefits and unfair advantages (Denmark; Germany; Poland; Portugal). Where the mechanisms concerning price control are concerned, one must particularly consider whether these instruments are only applicable to B2C contracts, or whether they form part of the Member State s general contract law and are thus applicable to all contracts (e.g. B2B), as is for example the case in Denmark, France, Germany and Poland. To a certain extent, the national legislation does not just look at the contract terms when determining the (un)fairness, but also the parties to the contract (i.e. whether it concerns a consumer). It may therefore be the case that the test is not purely objective, but is actually subjective in nature. French and Romanian law do not have a rule similar to Art. 4:109 PECL. However, the French Cour de Cassation decided that the general contract law concepts of cause, equity or unfairness can be used to control the price, also in C2C contracts. Romania applies the principle of pacta sunt servanda, but makes concessions for unforeseeable circumstances. Furthermore, it is also possible that legal developments in other Member States are also affected; an example is the present discussion in the United Kingdom concerning bank charges. The United Kingdom seeks clarity with regard to the scope of this exception within the context of this discussion. 16 Therefore, as has been demonstrated by individually negotiated terms (see above III.3.2), the unfair terms control and general contract law are inseparably interconnected. Hence, (1)the proposed Consumer Rights Directive must not prevent Member States from controlling the unfairness terms concerning the contract s subject matter and price as long as the future European Directive does not include a full set of rules replacing the Member States corresponding rules. (2)the scope of the unfairness test must be clearly drafted: there must be no doubt as to the European Parliament s decision about whether Member States shall be free to extend the scope of the unfairness test to terms concerning the contract s subject matter and price. 14 CJEU, Press release 52/10 from 3 June 2010 concerning C 484/08, Caja de Ahorros y Monte de Piedad de Madrid./. Asociación de Usuarios Servicios Bancarios (Ausbanc). 15 See questionnaire, especially question See Department for Business, Innovation and Skills (BIS), Call for Evidence. Consumer Rights Directive: allowing contingent or ancillary charges to be assessed for unfairness, July IP/A/IMCO/NT/ PE

20 4. The unfairness test Besides the questions of scope, the crucial problems of full harmonisation of Chapter V concern the unfairness test. Three problems merit particular attention, namely: - Harmonisation of lists of unfair terms (Art. 34 f., Annex II and III of the Proposal). Here the interplay of legislative and judicial formulations of prohibitions deserves particular attention. - Harmonisation of the general unfairness test (Art. 32 (1) and (2) of the Proposal). - Inclusion of individual aspects into the unfairness test (Art. 32 (2) of the Proposal). These problems can neither be fully understood nor adequately be resolved unless the relation of unfair terms control and general contract law is clearly analysed. Here, the following aspects are of particular importance: (1) Standards of fairness At present, the unfairness test has different forms within the various national laws, and not only with respect to the links between the significant imbalance of the parties rights and obligations and the requirement of good faith. 17 Whereas in some countries, such as France, the question of unfairness is normally left to first instance judges, in other jurisdictions, such as Germany, it is fully controlled by the highest court (see questions 7 and 8 of the questionnaire (Annex II)). What is more, the example above shows that every judgment on the unfairness of a contract term depends on explicit or implicit standards of contractual fairness. The question, whether a specific contract term causes a significant imbalance in the parties rights and obligations arising under the contract (Art. 3 (1) Unfair Terms Directive; Art. 32 (1) of the Proposal), raises the prior question of standards defining a balanced distribution of rights and obligations between the parties. Hence, two crucial questions concerning the impact of full harmonised control on unfair terms arise, namely (a) the precise legislative status of the unfairness test and especially whether its application shall be ultimately controlled by the CJEU, and (b) whether (and how far) the assessment of the unfairness would consider, or deviate from, the standards in the different national contract laws. If the aim of full harmonisation of unfair terms control is to enable traders to use the same standards throughout the European Union, the standards defining contractual fairness must be of legal nature and they must be controlled by the CJEU. This becomes apparent from the present state of law in France. Here, the unfairness test is primarily as- 17 Here the laws in the Member State law are very diverse. For example, both criteria are expressly mentioned in Romanian law, in which only an imbalance caused in bad faith is sanctioned. In Portugal, case law establishes a direct connection between the control based on good faith and an adequate balance between parties rights and obligations. Under German law, 307 (1) 1 BGB uses the main notions of the Unfair Terms Directive, but (2) adds more concrete guidelines: the reference to the non-mandatory law (no. 1) and the presumption of unfairness where essential rights and duties following from the nature of the contract are restricted in such a way that attaining the purpose of the contract is endangered (no. 2). However, in the other Member States forming part of this study, the unfairness test is based on key words that deviate from the wording in the Unfair Terms Directive. For example, according to Section 36 of the Danish Formation of Contract Act, the courts can, in whole or in part, disregard an agreement if it would be unreasonable or contrary to principles of fair conduct to enforce it. The decision can rely not only on the circumstances surrounding the formation of the contract, but also on its content and on subsequent circumstances. Furthermore, one must consider that the unfairness test in some Member States (as in Germany and Denmark) may also apply to B B contracts as well as B C contracts; however, the legal criteria or the application thereof may differ on both levels. In Poland, the unfairness test is based on two main concepts: conflict with good customs and a flagrant violation of consumer interest (Article 3851 of the Polish Civil Code). According to the prevailing interpretation, a flagrant violation of consumer interest normally means an unjustified disproportion of consumer rights and duties in a contract; conflict with good customs is seen as a violation of contractual balance. IP/A/IMCO/NT/ PE

21 sessed and applied by the juges du fond (first instance judges) without the Cour de Cassation exerting real control in this respect. Hence, the unfairness test is not uniformly applied: A specific contract term may be judged unfair by one court and fair by another. This makes apparent that substantial full harmonisation obviously requires a uniform legal standard to be applied for such purpose. Today, in most legal systems such standards are derived from, or at least conform to, non-mandatory contract law. 18 If there is no uniform European standard which would be uniformly interpreted, one and the same term might be regarded as invalid in one legal system, whereas it may be upheld in another. Indeed, contract terms are often regarded as unfair in one Member State despite conforming to the non-mandatory rules of other legal systems. 19 One example is a standard term requiring the buyer to pay 30% of the price straightaway when concluding the contract. According to the German jurisprudence, such a standard term must be regarded as unfair and invalid as it deviates from the legal rule in 320 of the German Bürgerliches Gesetzbuch according to which no party is required to perform in advance. 20 However, Art. L of the French Code de la consommation regards it as a matter of course that such terms are valid. Today, no European standard of contractual fairness exists, and not even in the weak form of a minimum standard. Thus, in the leading case Freiburger Kommunalbauten GmbH /Ludger Hofstetter et al., 21 the CJEU entrusted the fairness control primarily to the Member States courts. The decision given in Océano Grupo Editorial SA et al./rocío Murciano Quintero et al., in which the CJEU declared specific jurisdictional terms as void, 22 must be taken as an exception. 23 The Court continues to assume that the values and principles which are necessary for applying Art. 3 (1), 4 (1) of the Unfair Terms Directive, can only be derived from the applicable non-mandatory contract law as a whole. A uniform standard for a genuine European fairness control is not easy to find. In recent times, the application of non-legislative standards, such as the Principles of European Contract Law (PECL) 24 or the UNIDROIT-Principles 25 on International Commercial Contracts, has been discussed in academic debate. 26 Those Principles would then be used as 18 In Germany, there is even a legislative provision linking the unfairness test with the non-mandatory rules. A term is deemed unfair, in the case of doubt, if it deviates from essential basic ideas (wesentliche Grundgedanken) of the statutory regulation ( 307 (2) no. 1 BGB). This is called the guiding function of the dispositive law (Leitbildfunktion des dispositiven Rechts). Thus German law gives more guidance to the courts than the present Unfair Terms Directive. In most other Member States, such a reference to non-mandatory law is not provided by the rules of the unfairness test; however, there is nevertheless an acknowledgement of the relevance of non-mandatory law. For example, in Denmark, the unfairness test according to the general clause of the Formation of Contract Act is an overall assessment of the facts of the individual case. The default rules of contract law are important factors as far as the assessment of the content of the terms is concerned. The general rules and principles of contract law are generally assumed to express what is a reasonable balancing of the parties loyal interests in typical situations. In Portugal, legal literature recommends that the judge follows the default statutory provision, and similarly, in Romania, the judges adhere to statutory rules, also. 19 Kieninger, Vollharmonisierung (n. 3), 801 ff. 20 OLG Dresden (28 April 1999), (1999) Verbraucher und Recht CJEU, 1 April 2004, C-237/02 Freiburger Kommunalbauten GmbH./. Ludger Hofstetter et al. 22 CJEU, 27 June 2000, Joined Cases C-240/98 C-244/98, Océano Grupo Editorial SA and Salvat Editores SA, [24]. 23 CJEU, 1 April 2004, C-237/02, Freiburger Kommunalbauten GmbH./. Ludger Hofstetter et al., [23]. For an overview of CJEU case law, as well as comments on unfair terms in the Proposal, see J. Stuyck, Unfair Terms, in: G. Howells, R. Schulze (eds), Modernising and Harmonising Consumer Contract Law, (2009), , 120 ff. 24 O. Lando, H. Beale (eds), Principles of European Contract Law, Parts I and II, 2000; O. Lando, E. Clive, A. Prüm, R. Zimmermann (eds), Principles of European Contract Law, Part III, UNIDROIT (ed.), Principles of International Commercial Contracts, 2 nd ed., 2004 (1 st ed., 1994); the black letter rules are available at for the official comments, see 26 J. Basedow, in: Münchener Kommentar zum BGB (vol. 2a, 4 th ed., 2003), 307, [26]; further references in Jansen, Klauselkontrolle im europäischen Privatrecht: Ein Beitrag zur Revision des Verbraucheracquis, (2010) Zeitschrift für Europäisches Privatrecht, , 98 ff. IP/A/IMCO/NT/ PE

22 guidance (Leitbild) when specifying the meaning of the unfairness test. 27 Clearly, such suggestions raise serious concerns of legitimacy, of course, as those principles are not promulgated by national Parliaments; rather, they are written by private groups of academic lawyers. However, an alternative standard might be found in a political Common Frame of Reference, if this instrument really comes into existence (see below III.4.2). In any event, substantial full harmonisation of unfair terms control unavoidably creates a huge additional workload for the CJEU (see below IV.2.2); this may indeed have been a motive for the Court s decision in Freiburger Kommunalbauten. 28 Clearly, the CJEU could no longer leave the application of the Unfair Terms Directive primarily within the discretion of the Member States courts. Rather, it would have to have the last voice in determining European standards of contractual fairness. As a result, the CJEU would become the highest European Court for nearly all matters of contract law. By ultimately deciding on the fairness and unfairness of specific contract terms, the Court would formulate judicial lists of contract terms that are normally regarded as being unfair unless they are individually negotiated (below III.4.2). It can safely be said, therefore, that full harmonisation of unfair terms control will lead to an increasing judicial harmonisation of general contract law. (2) Concurrence with general rules of contract law Rules on unfair terms control are not the only legal devices used to control the fairness of terms. Traditionally, all legal systems also employ, for this purpose, rules that were not specifically designed for contract terms that have not been individually negotiated. Examples for these general devices are, in particular: mandatory prohibitions on specific contract terms: As reported by the correspondents, the law in all of the nominated Member States contains many mandatory rules specifically forbidding certain contract terms. This protective mandatory legislation seems, to a wide extent, to be within the scope of Chapter V of the Proposal in so far as it specifically regulates contract terms (in various kinds of contracts including non-consumer contracts or only in consumer contracts) stipulating that specific (types of) contract terms are not binding. An example is 276 (3) German BGB stating that liability for intentionally inflicted harm cannot be excluded in advance. Under full harmonisation of the general unfairness test in Chapter V, this protective legislation could barely be upheld with regard to consumer contracts, whereas it would not be affected as far as nonconsumer contracts are concerned. This impact on national contract law is noted in the Danish national report, inter alia, for the Insurance Contracts Act, the Financial Business Act, the Act on Certain Consumer Contracts and the Arbitration Act. The mandatory national rules on arbitration clauses are, amongst others, also given as an example in other national reports (such as in France; whereas in the United Kingdom, a contract which ousts a party s access to the courts would, in principle, be treated as an illegal contract; however, arbitration clauses are permitted and access to the courts in arbitration has been reduced by the Arbitration Act 29 ). Examples that are often given are also mandatory rules of the Member States law concerning disproportionate damages and penalties (e.g. in Portugal and the United Kingdom; whereas 27 See above at n See the Advocate General s opinion, [20]-[22] and [30]. 29 Consumers cannot be bound in advance, however, to arbitration disputes less than 5000 GBP. However, in Cyprus there is no practice of, or statutory basis for consumer arbitration. IP/A/IMCO/NT/ PE

23 penalty clauses under the law of some other Member States such as in Germany and Romania are not void, but may be reduced by the court provided that certain conditions have been fulfilled), the advance exclusion of the liability for loss or damage resulting from a breach of duty (as also in Portugal), the exclusion of liability for intentionally inflicted damages (e.g. Poland and Germany) and the sale on instalments (inter alia, in Poland). Furthermore, in the United Kingdom, the Unfair Terms Act 1977 prohibits a number of contract terms that are also, in part, prohibited in other Member States by specific mandatory rules. 30 Aside from the provisions concerning the transposition of directives (e.g. on consumer credit contracts, package holiday contracts and timeshare contracts) there are also other contracts such as, inter alia, construction work contracts, leasing contracts and storage contracts (as regulated, for example in the Polish civil code, but which are also to be found in the laws of other Member States). A complete list of the individual provisions is not possible in this brief summary. However, the examples given show that the laws of the Member States do contain, in a very broad scope, mandatory rules specifically forbidding certain contract terms and that a considerable part of these mandatory rules fall under the scope of Chapter V. All of these terms would be affected by full harmonisation of the general clause. In its present form, the Proposal, would apparently make it necessary to abolish or modify all those rules. For example, according to Annex III 1 (c) of the Proposal, penalty clauses would only be presumed to be void, and this presumption would only apply if the penalty significantly exceed(s) the harm suffered by the trader. The general invalidity of such clauses in Portugal and England goes far beyond this rule. rules on imbalance, illegality and on the ordre public / bonos mores / good faith: In some countries, such rules can be used for controlling unfair contracts, not only with regard to specific contract terms, but also with regard to the price on which the parties agreed. Similarly, specific contract terms might be regarded as contrary to good faith, even if not formulated in advance or as general contract terms. The responses from the correspondents show that the laws of the Member States contain numerous rules on terms that may directly or indirectly produce an imbalance on the parties rights and obligations, rules on illegality and bonos mores as well as general clauses on good faith (see questionnaire 4 a c). For example, in France the rules on economic duress, la cause objective, faute lourde (developed through jurisprudence) and lesion protect, in one form or the other, a party to the contract in cases of imbalance. The concept of illegality is used against illegal terms (though in France the notion of bonos mores does not allow for the control of the significant imbalance). The rule providing that contracts must be executed in good faith allows judges to punish the unfair use of a con- 30 Examples are - the exclusion of liability for death and personal injury caused by negligence, - the exclusion of sellers statutorily implied undertakings as to title and in the consumer context implied undertakings as to conformity of the goods with description or sample, quality or fitness for purpose, - for goods ordinarily supplied for private use or consumption exclusions in guarantees of loss or damage arising from the goods proving defective or resulting from the negligence of a person involved in manufacture or distribution and guarantees, not provided under contracts in which ownership and possession are transferred, cannot exclude or restrict liability for loss or damage resulting from a breach of duty of a person concerned in the manufacture or distribution. Numerous other mandatory rules of this kind concern terms in forms of contracts other than the aforementioned sales contract. IP/A/IMCO/NT/ PE

24 tractual prerogative (but not to modify the very core of the rights and obligations that have been legally determined by the parties; see Com. 10 July 2007, Bull. IV, n. 188). In Poland, the provisions on exploitation, circumvention of statutory law, inconsistency with the principles of community life and freedom of contract (Art. 358, 58, 3531 Polish Civil Code) have, to a certain extent, a similar effect. They can be used to control any contractual provision (also on the price and main subject-matter of a contract). The reference to the principles of community life in Art. 58 and 3531 Polish Civil Code is set to be replaced by the bonos mores clause. However, the sole reference to good faith cannot be used in the unfairness test based on general rules. Similarly, the Portuguese Civil Code contains rules on contract terms that may directly or indirectly produce an imbalance resulting from the exploitation of one party s weaknesses, necessity, dependence, or mental state (Art. 282 Civil code) and rules on illegality and bonos mores (Art. 281 Civil code). In this respect it is likely that the general concept of good faith in contract negotiation will be of significance in Romania: the new Romanian civil code introduces it in a form that is similar to the UNIDROIT Principles on Commercial Contracts. The requirement of good faith is also to be found in Romanian law in the rule on contract interpretation. In Germany, it is above all the very broad general clauses in 138 and 242 BGB (regarding boni mores, usury and good faith) that concern this field. In Denmark, however, the general principles with regard to the loyalty between contract parties, the proportionality and the abuse of rights are nonstatutory in nature and, since the Formation of Contract Act was passed in 1975, the distinction between the non-statutory principles and the general clause of this Act has been blurred. rules on unfair exploitation of the contract partner s inferior position (unfair exploitation) and other rules dealing with the problems of vitiated consent: Rules of vitiated consent possibly conflict with a fairness control if the general unfairness test also relates to individual factors, such as the circumstances attending the conclusion of the contract (Art. 4 (1) Directive, Art. 32 (2) Proposal). See below III.4.3). Thus, some national rules on vitiated consent can have the effect (at least indirectly) of controlling unfair contracts. In the United Kingdom, and also in Cyprus, the rules on undue influence can be used for this purpose, i.e. in the situation where one party has both a position of influence over the other party and abuses this position. 31 Contrastingly, in Germany several cases of guarantees from close relatives fall under the aforementioned 138 BGB (irrespective of rules also existing on misrepresentation and duress). At present, there is no relevant case law in Romania, although the Law no. 193/2000 introduced the concept contractual equilibrium and vitiated consent as legal reason for termination of a contract. In France, some rules relating to consent (in particular misrepresentation and duress) can indirectly lead to a control of the contractual balance. The concurrence of such rules did not cause serious problems as long as the control of unfair contract terms was guided by the principle of minimum harmonisation. However, if the control of unfair contract terms is fully harmonised, the application of such 31 More specifically, the law in the United Kingdom distinguishes between actual undue influence (which may overlap with duress) and certain relationships (but not that of husband and wife) where there is a presumption. However, the value of this presumption has been weakened by the House of Lords decision in Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44, [2002] 2 AC 773, where it was made clear that it was only a presumption and it was important to benefit from considering the facts and it drew a possible distinction between a presumption of influence and a presumption that it had been abused. IP/A/IMCO/NT/ PE

25 rules becomes highly problematic. For each rule it would have to be decided whether its application should be barred by the future European Consumer Rights Directive. Taking into account the CJEU s rather restrictive jurisprudence concerning the application of the Unfair Commercial Practices Directive, 32 it is not even unlikely that the Court might regard most of these rules as violations of a fully harmonising directive. At any rate, substantial full harmonisation cannot be achieved without enforcing farreaching changes on the Member States contract laws. Of course, such interference must be accepted if it is politically necessary. But those changes are problematic not only from a political, but moreover from a technical point of view: Administrating such changes will be an exceptionally huge task for both the Member States courts and the CJEU because such decisions will always be highly complex and may result in unequal treatment of citizens. There is only one simple solution, namely an exclusion of the application of all the Member States control mechanisms with regard to unfair contract terms which have not been individually negotiated. However, such a solution is probably not feasible because, for such an approach, the future directive would have to include all those aspects that are presently covered by general contract law. This is particularly true if the individual circumstances of the conclusion of the contract are regarded as a relevant factor to be included in the general unfairness test (below III.4.3). Of course, a considerable part of the aforementioned rules do not have the same rationale, the same object and the same aim as the general clause regarding protection against unfair terms. In this respect it could be argued that it would be possible to determine the scope of Chapter V on the basis of its rationale, or political aim, and to allow for the application of national instruments as far as they are based on different considerations. For example, in France the rule on economic duress indirectly protects the weaker party against excessive imbalance. Yet, it does not have the same rationale and aim as the general clause on unfair contract terms because the latter protects contractual balance, whereas the former protects the freedom of consent. However, such a complex solution is not feasible. At present there is no general view as to the rationale of unfair terms control (this divergence is reflected in grossly diverging views as to the adequate scope of protection of unfair terms control, see above III.4 at (1)). In addition, in most legal systems it is difficult to clearly determine a single one rationale, or objective, of a legal institution such as illegality, mistake, or undue influence. Normally such instruments serve different purposes which partly overlap with those of unfair terms control. Finally, if such an approach would be chosen, the CJEU would be burdened with huge amount of difficult cases concerning the scope of Chapter V. In these cases, the CJEU would have to base its judgment partly on the interpretation of the relevant Member State s domestic law. This would barely be possible and would be difficult to reconcile with the political and judicial function of this Court. 4.1 Legislative and judicial lists In legal practice, black and grey lists of unfair terms are not only laid down by the legislator: Prohibitions of specific unfair terms are also formulated perhaps even to a larger extent by the courts interpreting the general unfairness tests. Indeed, where the highest court is confronted with a specific contract term, it will usually decide whether such terms are normally regarded as fair or unfair. This is especially the case where legal 32 Cf. CJEU, 14 January 2010, C-304/08, Zentrale zur Bekämpfung unlauteren Wettbewerbs ev./. Plus Warenhandelsgesellschaft mbh, [35] ff. IP/A/IMCO/NT/ PE

26 proceedings are brought not by an individual consumer, but rather by a consumer organisation or another agency that is competent to challenge standards terms under Art. 7 (2) Unfair Terms Directive (Art. 38 (2) Proposal). Normally, such judicial prohibitions are collected in commentaries or other forms of legal literature. From the point of view of traders and consumers, it makes no difference whether a specific prohibition has been expressed by the legislator or by the courts. This interplay of legislative and judicial formulations of prohibitions on unfair terms is important for the aim of fully harmonising unfair terms control: (1)All restrictions on legislators to formulate new prohibitions must also apply to the Member States courts. Such restrictions are necessary if the black (and grey ) list(s) aim at full harmonisation, i.e. if a higher level of consumer protection shall be precluded (models 1 and 2). If these restrictions would not apply to the Member States courts, these courts could easily establish a higher level of consumer protection than envisaged by the directive. As a result, the prohibitions on the Member States legislators would ultimately be without effect. The recent jurisprudence on the Unfair Commercial Practices Directive clearly shows that the CJEU would not accept this. 33 This finding is particularly relevant with regard to attempts of finding a midpoint between full and minimum harmonisation. For example, it could be asked whether the competence of Member States to add additional unfair terms to the black and to grey lists could be subjected to additional requirements, for example that the terms added were essential in order to protect consumers appropriately, or that they were proportionate and effective. Such restrictions could be of no effect with regard to judicially formulated lists; thus they would not lead to further harmonisation, but rather to unnecessary litigation. (2)The interpretation of the prohibitions contained in the black (and grey ) list(s) would have to be administered by the CJEU. Indeed, every case ultimately depending on the interpretation of a prohibition in the list(s) would have to be referenced to the CJEU for a preliminary ruling. (3)It is not possible to provide for targeted full harmonisation only of the ( grey and) black list(s) while leaving the interpretation of the general unfairness test to the Member States courts. The reason for this is evident: The formulation of the general unfairness test is based on the assumption that there may be other types of unfair terms than those contained in the lists. Hence, the Member States courts cannot administer the interpretation and application of the general unfairness test without formulating prohibitions on specific contract terms brought before them. As a result, they would necessarily have to violate the prohibition on adding further prohibitions to the ( grey and) black list(s) by deciding about the general fairness test. 33 CJEU, 14 January 2010, C-304/08, Zentrale zur Bekämpfung unlauteren Wettbewerbs ev./. Plus Warenhandelsgesellschaft mbh, [35] ff. IP/A/IMCO/NT/ PE

27 4.2 Art. 32 Proposal and the general unfairness test It has been seen above (III.4 at 1)) that the interpretation of the general unfairness test requires the application of legal standards expressing a conception of contractual fairness. At present, however, no such standards have been acknowledged. As a result, no effective harmonisation seems feasible in this central aspect of unfair terms control. 34 Authors criticising the restrictive approach of the CJEU in this respect have suggested the application of non-legislative standards such as the Principles of European Contract Law, the UNIDROIT-Principles, or the Draft Common Frame of Reference. In future, an even more appropriate alternative might be the political CFR. Even if this instrument would not be formally binding, it would be backed by the political authority of European institutions and could be regarded as a genuinely European instrument. At the same time the CFR would become the most important reference text in European contract law if the CJEU would indeed use it for such purpose. The CFR would be seen as defining European standards of contractual fairness; as such, it would inevitably inform the daily practice of all contract lawyers in Europe. It is obvious that such a model would have significant consequences for European contract law and especially for the judicial practice of unfair terms control. Attention should especially be paid to the following points: (1)Judge-made character of future European contract law Future European contract law would largely be entrusted to the judiciary. A less specific instrument such as the PECL or the DCFR cannot guide the courts in the same degree as a comprehensive and conclusive, formally binding codification. Hence, judges i.e. the CJEU would ultimately decide about the fundamental principles and rules of European contract law. As a result, it can safely be said that such a model would be an important step in the process of judicially making a common European contract law. (2)Additional workload for the CJEU The judge-made character of European contract law will unavoidably lead to a significant additional workload for the CJEU. In many areas of contract law, the CJEU will either have to flesh out the provisions of the CFR or even lay down new rules, especially as far as specific rules for particular types of contracts are concerned. For details, see below IV. (3)More room for standard terms / less intense control At present, international Principles, such as the PECL, the UNIDROIT-Principles, and especially the DCFR, are less specific than the Member States codifications and statutes; they contain many open-textured rules and general clauses and ask the judge to make reasonable judgments. As a result, it will probably be more difficult to show a specific contract term as being unfair than is presently the case when applying a Member State s codification. Hence, traders will probably have more freedom to set the rules of their contracts themselves. It may be argued, therefore, that such a model is less consumer friendly than the present, more thorough, approach of many national courts. It is not fully clear, however, whether such an impression is correct. In many instances where uniform rules are little specific and leave discretion for a reasonable decision by the judge, this can be easily explained with the fact that the Member 34 CJEU, 1 April 2004, C-237/02, Freiburger Kommunalbauten GmbH./. Ludger Hofstetter et al. IP/A/IMCO/NT/ PE

28 States laws diverge from one another. For instance, it is not clear whether the seller of a right should be strictly liable for the existence of the right, or whether liability for fault is the more appropriate standard. This is a very difficult problem of contract law for which it is difficult to find a cogent solution. 35 Yet, as far as there are no uniform rules and thus no common conception of contractual justice, it is unclear why parties should be prevented from determining the terms of their contracts themselves. 4.3 Individual circumstances According to the present Unfair Terms Directive (Art. 4 (1)) and also to the Proposal (Art. 32 (2)), individual circumstances are always relevant for assessing the unfairness of a contract term. This approach corresponds with the equity tradition of English law; it can also be found in the Nordic legal systems. 36 And indeed, there can be no doubt that the individual circumstances of the conclusion of the contract may be an important factor in determining the contract s fairness and validity. For instance, one party may have taken advantage of the inexperience, ignorance, improvidence, the lack of bargaining skills, the economic distress, or any other factor putting the other party into an inferior bargaining position. Similarly, it cannot be questioned today that a change of circumstances may make it necessary to adapt a contract to the new situation, or even to give one party a right of rescission. Most legal systems acknowledge rules specifically dealing with such situations. Nevertheless, it may be unwise to include such aspects into a European unfairness test concerning the control of unfair contract terms that have not been individually negotiated. (1)Different problems need specific rules It is generally doubtful whether aspects relating to the conclusion of the contract and the problems resulting from the fact that contract terms have not been individually negotiated should be dealt within a single provision. In fact, these are different problems that should be addressed by different types of rules. Thus, if one party takes unfair advantages of the other party s individual situation, it will probably be necessary to also control the price and the definition of the contract s main subject matter. Additionally, if one party takes unfair advantage of the other party s inferior position, it is probably also necessary to subject those terms which have been individually negotiated to legal scrutiny. Similar considerations apply to a change of circumstances. A change of circumstances must also be regarded as relevant if it relates to individually negotiated terms and to the question of price. (2)Irrelevance in public action It is clear that the individual circumstances of the conclusion of the contract cannot be relevant when organisations, which have a legitimate interest in protecting consumers, take action against the use of specific standard terms (cf. Art. 7 (2) Unfair Terms Directive). Yet it is doubtful whether it is wise to apply different legal standards in different forms of legal proceedings. 35 Cf. Jansen, Klauselkontrolle, 101 f. 36 Cf. P. Nebbia, Unfair Contract Terms in European Law. A Study in Comparative and EC Law, 2007, 60 ff., 66 f., 131, 158 f.; T. Wilhelmsson, Control of Unfair Contract Terms and Social Values: EC and Nordic Approaches, (1993) 16 Journal of Consumer Policy, , 443 f. IP/A/IMCO/NT/ PE

29 (3)Specific problems concerning full harmonisation The problems explained under (1) are of particular relevance for a European directive aiming at full harmonisation. If the inclusion of the individual circumstances into the fairness test remains a minimum requirement, the Member States are free to supplement the general unfairness test with specific rules relating to undue influence, unfair exploitation, and changed circumstances. It is doubtful, however, whether this will be possible under a fully harmonising regime. It follows that the inclusion of the individual circumstances of the conclusion of the contract into the general fairness test is only possible under the model of targeted full harmonisation (above III.2. at (3)). Second, the inclusion of the individual circumstances of the conclusion of the contract into the fairness test makes it difficult for traders to use uniform standard terms throughout the European Union. This will especially be the case if courts make no explicit statements as to whether their judgments concerning the unfairness of a specific contract term relate to the individual circumstances of the conclusion of the contract, or whether they are based on a general assessment of the term. Where judgments are not explicit in this respect, traders will not be sure about whether they may continue to use their standard terms. 5. Transparency of contract terms, Art. 31 Proposal Even if the question from the European Parliament focuses on the general clause of the unfairness test (Art. 32 Proposal), it is linked to the requirement of transparency (Art. 31, Rec. 47 Proposal) which thus necessitates a few comments. (1)In its present form the Proposal appears as to be an adequate solution, even if it may be difficult to clearly distinguish the description of the subject of the contract and other contract terms; it expresses a far-reaching European consensus (cf. Art. 4:110 (2) PECL). Difficulties arise, however, where terms are not intentionally drafted so as to be transparent, but are nevertheless not fully transparent as it would be difficult and costly for the trader to draft the contract more transparently. An example is a term, whereby the trader transfers an increase in his own prices directly to consumers. In such cases, it must be justified, why the trader shall bear the additional costs. The right place for such discussion may therefore be in the context of information duties. In the present Proposal, the question is left open and thus entrusted to the CJEU (which may be an adequate approach). It must be clear, nevertheless, that a decision by this Court would prevent Member States from imposing additional requirements of transparency. (2)Art. 31 (4) Proposal prevents Member States from imposing any presentational requirements as to the way the contract terms are expressed or made available to the consumer. This new rule, which does not exist in the Unfair Terms Directive, relates to the form of contracts. The provision seems to prevent Member States from imposing any formal requirements. Even if this provision aims at allowing traders to choose freely the front type or size in which the contract terms are drafted (Rec. 47), its meaning is wider and may be understood as including a wide range of formal requirements. This might have a huge impact on Member States, such as France, where consumers are used to being protected by such formal requirements. As long as the directive does not aim at substantial full harmonisation, it may be politically difficult to justify full harmonisation of this specific requirement as traders could in any event not use the same set of standard terms. IP/A/IMCO/NT/ PE

30 IV. Consequences for the work of the Court of Justice of the European Union (CJEU) Every prediction on the relevance of full harmonisation of Chapter V on the CJEU s workload bears an element of uncertainty, as the workload will depend on the behaviour of national judges and on their often political decisions to bring specific questions before the court. Here, a general increase in disputes before the CJEU, irrespective of harmonisation issues, can be observed (see Statistics of Judicial Activity, 2009); 37 at the same time, there is a significant increase of the number of Member States bringing questions before the Court (25 Member States in 2009). As far as possible, this general increase must remain in the background, whereas the focus of this paper is on the possible effect of full harmonisation of Chapter V. However, it must be pointed out that there is at present little experience with the impact of other directives that were based on the principle of full harmonisation. 38 Nevertheless, it is possible to formulate a general assessment on the basis of existing experience with fully harmonised directives, on the one hand, and provisions on unfair contract terms. Indeed, among the directives in the field of consumer law, the Unfair Terms Directive gave rise to the largest number of disputes (see Graph 1 in Annex I). Two factors are likely to increase the CJEU s workload as a result of full harmonisation: - the definition of the States room for manoeuvre in case of full harmonisation (Art. 267 TFEU), possibly also resulting in actions against Member States failing to fulfil their obligations (Art. 258 and 259 TFEU) (below 1.), and - the issue of unfair terms interpretation (Art. 267 TFEU, below 2.), and 1. The scope of full harmonisation The definition of the Member States margin of manoeuvre in the case of full harmonisation is crucial for legal certainty. As this level of harmonisation prevents Member States from establishing national rules which grant a different level of protection to consumers, regardless of whether such rules are established by specific consumer legislation or by provisions of general contract law, possible conflicts between the directive and national law may be numerous. Even outside the harmonised scope, the objectives of a directive must not be compromised by national rules. Hence, a significant increase of questions referred to the CJEU may safely be predicted where consumer law is fully harmonised. Such questions will be all the more frequent as their answers are not obvious. Indeed, it is very hard to precisely describe, in general, the factors determining the scope of Chapter V. These problems can be illustrated by existing directives. The first example concerns the Product Liability Directive 85/374/EEC. As this Directive limits liability to damage to consumer goods (Art. 9), the question was raised whether Member States could extend its scope to damage to professional goods. While all the French analysts were in favour of the first answer, the CJEU chose the second one There is only Directive 85/374 concerning liability for defective products, where total harmonisation became an issue only in 2002 (CJEU, 25 April 2002, C-52/00, Commission./. France; CJEU, 25 April 2002, C-183/00, María Victoria González Sánchez./. Medicina Asturiana SA), and Directive 2005/29 concerning unfair commercial practices. 39 CJEU, 4 June 2009, C-285/08, Société Moteurs Leroy Somer./. Société Dalkia France. IP/A/IMCO/NT/ PE

31 A second example may be found in the first series of questions referred concerning the Unfair Commercial Practices Directive, according to which the States must modify their legislation because of the full harmonisation of the directive: Belgium s laws on joint tender procedures, 40 Germany s rules on gambling, 41 and Poland s laws on joint tender procedures 42 ). The very existence of these judgments reflects how difficult it is for States to realise the extent of the interactions between the provisions of their national legislation and a full harmonisation directive. Such difficulties are attenuated, however, where the harmonised scope of a legal instrument is targeted and clearly limited. For instance, full harmonisation of the rules concerning the right of withdrawal will probably not raise many specific questions specifically relating to the level of harmonisation. Thus it can safely be stated: (1)The number of questions likely to arise under full harmonisation depends on the size of the scope of the European instrument and on the complexity of its impact on national contract laws. Here, no other Chapter in the Proposal has a larger scope and hence a larger impact on the Member States laws as Chapter V. Furthermore, irrespective of the definition of the harmonised scope, the questions regarding the consequences of such rules on national laws are likely to be numerous, especially if the European instrument and the traditional Member States instruments are closely interrelated or are based on similar, though not identical, rationales or objectives. An example is again the Product Liability Directive. Here the CJEU had to issue no less than three judgments solely on the liability of the distributor instead of the producer. 43 Hence, it can safely be stated: (2)The number of questions likely to arise under full harmonisation depends on the complexity of the directive s impact on national contract laws. Here, no other Chapter in the Proposal is as inseparably interconnected with the Member States traditional contract laws as Chapter V. Indeed, as shown above (III.4 at (2)), a large number of national legal institutions possibly conflicts with a fully harmonised unfair terms control. Hence, a great number of questions must be expected if the general unfairness test will be fully harmonised. Such questions raised by the technique of full harmonisation are highly technical. This explains the need for national courts to refer questions to the CJEU, which becomes apparent from the significant increase in the number of actions brought to the CJEU during the past few years with regard to two fully harmonised directives (Product Liability Directive; Unfair Commercial Practices Directive; see Graph 1 in Annex I). Additionally, Member States incorrectly transposing the directive into their national law might be confronted with actions under Art. 258 and 259 TFEU. Currently the only such cases under consumer law relate to the Product Liability Directive (see Graph 2 in Annex I). 44 Even if the number of judgments remains limited (five judgments), these disputes before the CJEU are directly linked to the level of full harmonisation. 40 CJEU, 23 April 2009, Joined Cases C-261/07 and C-299/07, VTB-VAB NV and Galatea BVBA. 41 CJEU, 14 January 2010, C-304/08, Zentrale zur Bekämpfung unlauteren Wettbewerbs ev./. Plus Warenhandelsgesellschaft mbh. 42 CJEU, 11 March 2010, C-522/08, Telekomunicaja Polska SA w Waeszawie./. Prezes Urzędu Kommunimacji Elektronicznej. 43 CJEU, 25 April 2002, C-52/00, Commission./. France; CJEU, 10 January 2006; C-402/03, Skov Æg./. Bilka Lavprisvarehus A/S; CJEU, 14 March 2006, C-177/04, Commission./. France. 44 CJEU, 29 May 1997, C-300/95, Commission./. United Kingdom; CJEU, 25 April 2002, C-52-00, Commission./. France; CJEU, 25 April 2002, C-154/00, Commission./. Greece; CJEU, 14 March 2006, C-177/04, Commission./v. France; CJEU, 5 July 2007, C-327/05, Commission./. Denmark. IP/A/IMCO/NT/ PE

32 Indeed, the transposition of the Unfair Commercial Practices Directive is beginning to give rise to similar proceedings. The European Commission has already contacted some Member States asking them to modify their legislation. 45 Of course, this kind of dispute is particularly difficult to predict, as it depends on a more dialogical pre-litigation procedure. Nevertheless, an unclear scope of full harmonisation will most likely lead to an increase in the number of disputes. In any event, it can safely be predicted that a full harmonisation of Chapter V will result in a large number of cases concerning the precise scope of full harmonisation. This is true even if the scope of full harmonisation is clearly drawn. However, the number of cases will even increase where this is not the case. This is especially true for the model of formal, weak full harmonisation (above III.2 at (2)), where, for instance, the Member States competence to add further examples of unfair terms to the black and grey lists is subjected to further requirements (above III.4.1 at (1)). It may be feared that such a model would result in every addition to the national lists being ultimately be brought before the CJEU; this is especially true, where such requirements are formulated on the basis of open-textured concepts such as appropriate protection, proportionate, or effective. And the application of such concepts will be even more likely to give rise to litigation if these concepts relate to national law. This would be the case if the competence of adding new terms depends, for example, on the consumers appropriate protection under national law. 2. The interpretation of the unfairness test The Proposal uses, in the same way as the Unfair Terms Directive, two categories of general notions which need to be interpreted: - General criteria defining contractual unfairness. - Specific categories of terms in the black and grey lists (or in the Annex to the Unfair Terms Directive). In order to understand a possible increase in the workload of the CJEU resulting from the present Proposal, it is helpful to first recall the current role of the Court (2.1) before analysing whether that role would change under a regime of full harmonisation (2.2). 2.1 The present role of the CJEU In its judgment of 1 April 2004 (Freiburger Kommunalbauten) 46 the CJEU stated that it was for the CJEU generally to interpret the criteria defining the concept of unfair terms and that it was for the national courts to apply those general criteria to particular terms in order to assess their fairness in light of the particular circumstances of the case and the relevant contract law. This approach also applies to the interpretation of the weak grey list in the Annex to the Unfair Terms Directive, under which examples were merely of an indicative nature. 45 CJEU, 23 April 2009, Joined Cases C-261/07 and C-299/07, VTB-VAB NV and Galatea BVBA (joint tender procedures); CJEU, 14 January 2010, 304/08, Zentrale zur Bekämpfung unlauteren Wettbewerbs ev./. Plus Warenhandelsgesellschaft mbh (gambling); CJEU, 11 March 2010, C-522/08, Telekomunicaja Polska SA w Waeszawie./. Prezes Urzędu Kommunimacji Elektronicznej (joint tender procedures). 46 Above, at nn. 21 ff. IP/A/IMCO/NT/ PE

33 For instance, the CJEU ruled that a forum clause contained in a contract concluded between a professional and a consumer falls within the category of terms which have the object or effect of excluding or hindering the consumer s right to take legal action, a category referred to in subparagraph (q) of paragraph 1 of the Annex to the Directive. 47 Here, the CJEU only interprets the general criteria defining the concept of unfair terms; it is for the national courts to assess the unfairness of a specific term. 48 This approach made it possible for the CJEU to keep the workload resulting from the Unfair Terms Directive within reasonable limits. It was ultimately for national courts to assess the unfairness of actual contract terms in light of the specific circumstances of the case, the nature of goods or services, and in view of the applicable non-mandatory contract law as a whole. Hence, there were only few CJEU cases concerning the unfairness of contract terms. 2.2 The future role of the CJEU under a full harmonisation of Chapter V All this will change under a regime fully harmonising the unfairness control. First, the existence of the black and grey lists will increase the number of questions referred to the CJEU. This is even true under a model of minimum harmonisation, as it will be for the CJEU to decide whether a specific term is unfair in all circumstances (black list) or presumably unfair (grey list); this was not considered necessary as long as the annex to the Unfair Terms Directive was only of an indicative nature. However, only under a regime of full harmonisation will the Court be confronted with the converse questions, whether a specific term is not always viz. not presumably unfair. Hence, it must be expected that full harmonisation will duplicate the (already increasing) number of cases relating to the grey and black lists. Secondly, a more substantial full harmonisation requires a more uniform application of the general fairness test (above III.4.2). Hence, it would ultimately be for the CJEU to decide whether a contract term not covered by the grey and black lists is to be regarded as fair or unfair. Even if national courts (other than those of last instance, Art. 267 TFEU) will not be obliged to bring an action before the CJEU, they will nevertheless have strong motives to do so. On the one hand, the matter at stake namely whether or not a term which is regularly used in B C contracts is unfair will usually be of high importance. On the other hand, not only the general unfairness test under Art. 32 Proposal, but also the words defining unfair terms in the lists are often open to conflicting interpretations. Thus, it may be asked, whether the omission by a professional causing death or bodily injury needs to be intentional or whether negligence may be sufficient (Annex II(a) Proposal). Furthermore, the reference to agents in subparagraph b) of the black list is unclear as this term does not have the same meaning in all Member States as the concept of agency is not uniform. The additional workload for the CJEU may, in principle, be welcomed, as substantial full harmonisation will only be possible where the uniform application of European instruments is ensured by a European court. Indeed, it is one thing to draft lists, but quite another to apply such lists in a uniform manner. If Member States would interpret the examples given on the lists divergently, the objectives of harmonisation would be illusory. Hence 47 CJEU, 4 June 2009, C-243/08, Pannon GSM Zrt../. Erzsébet Sustikné Győrfi, [41]-[42]; CJEU, 27 June 2000, Joined Cases C-240/98 and C-244/98, Océano Grupo Editorial SA and Salvat Editores SA, [22]. 48 CJEU, 4 June 2009, C-243/08, Pannon GSM Zrt../. Erzsébet Sustikné Győrfi, [42]-[43]. IP/A/IMCO/NT/ PE

34 (1)A further harmonisation of consumer law is not possible without entrusting the administration of European consumer law to the CJEU; this necessarily entails an increasing workload for this court. This observation results in a second general rule: (2)The workload for the CJEU is likely to increase with a rise of the level of harmonisation. This observation especially holds true for the unfairness test (Chapter V). A high level of harmonisation is only possible when both the grey and black lists and also the general unfairness test (Art. 32) are applied in a uniform way. Without such a uniform interpretation, the professionals aim of using the same standards terms all over the European Union will remain an illusion. 3. Some results Applying these findings to the different technical models of full harmonisation (above III.2) leads to the following results: (1)Under the option of substantial full harmonisation, the CJEU will necessarily have to control not only the interpretation of terms in the lists, but also the whole application of the unfairness test, i.e. the general criteria for unfairness and its application to particular terms. The Freiburger Kommunalbauten case-law will be reversed and the interpretation of national courts would have to be controlled by the CJEU. Therefore this option entails a huge additional workload for the CJEU. At the same time, this option will unavoidably raise complex questions concerning the scope of full harmonisation (above 1.). Additional work will be a necessary result. Hence, this option cannot be recommended because it creates a huge additional workload, which the CJEU, in its present form, could not possibly cope with. (2)Under the option of weaker, formal full harmonisation, the application of the general unfairness test would continue to be administered by the Member States courts (Freiburger Kommunalbauten). With regard to the grey and black lists, minimum harmonisation would apply. Accordingly, the workload for the CJEU would probably increase. Yet, an overload of work is not to be expected. However, here difficult questions of determining the inconsistently defined scope of full harmonisation would arise; this leads to unnecessary and difficult questions to be decided by the CJEU. This option, therefore, cannot be recommended. (3)Also under the option of targeted full harmonisation, the application of the general unfairness test would continue to be administered by the Member States courts (Freiburger Kommunalbauten). With regard to the grey and black lists, minimum harmonisation would apply. Accordingly, the workload for the CJEU would probably increase, but an overload of work is not to be expected. Under this model, the scope of full harmonisation would be rather clearly determined, and the prevailing principle of minimum harmonisation would avoid conflicts with general contract law rules. Hence, few questions concerning the scope of full harmonisation will arise. This model will therefore not raise problems relating to the CJEU s workload. (4)The same would be true for a mere minimum harmonisation of Chapter V. The scope of full harmonisation would even less be a problem. IP/A/IMCO/NT/ PE

35 V. Proposals and drafting recommendations 1. Proposals and drafting recommendations concerning the level of harmonisation (1)Substantial full harmonisation of unfair terms control enabling traders to use uniform standard terms all over the European Union cannot be recommended at the present day. It would unavoidably have an extreme impact on all Member States substantive contract law and requires extremely far-reaching changes of and additions to the present Chapter V. Large parts of the Member States contract laws would have to be replaced by European rules as far as standard terms are concerned. Hence, the CJEU would have to be entrusted with the development of contract law. In its present form it could probably not be able to bear the resulting additional workload. Basic arguments: In all legal systems, the rules on unfair terms control are inseparably connected with other rules of general contract law and / or consumer law. Thus, all Member States contract laws contain rules controlling both individually negotiated and standard contract terms. Also, whereas the present Proposal forbids price control, all Member States acknowledge some means of controlling unfair prices. Yet, these instruments cannot be clearly separated from the rules on unfair terms control. If the national instruments are excluded from the ambit of full harmonisation, it will not be possible to use uniform standard terms across the European Union (above III.4 at (2)). If the rules on unfair terms control are to be applied in the same manner across the European Union, the CJEU will have to control the administration of all these rules. In case of dispute or divergence, it will have to decide, whether a specific term is fair under European law. Such cases will become standard as presently it is often a case that terms which are deemed unfair in one Member State are acknowledged as valid in other Member States. Hence the CJEU would need additional capacities to cope with this overload of work (above IV). No drafting recommendations are given as a whole set of contract law provisions replacing the Member States provisions would be necessary. (2)Weaker, more formal forms of full harmonisation of unfair terms control are an even less favourable option. Such an option cannot be recommended. It would inevitably lead to confusion, misunderstanding, and hence to an unequal treatment of citizens. This is especially the case, if the concept of full harmonisation is applied to the unfairness test while at the same time allowing for a different substantial interpretation of this test. Such full harmonisation would only exclude wholly unreasonable (absurd) national rules requiring an imbalance in the rights and obligations arising under the contract, to the detriment of the trader. If such an option is nevertheless chosen, it must be expressed as clearly as possible. IP/A/IMCO/NT/ PE

36 Basic arguments: At present, the fairness control is entrusted to the Member States courts. As a result, grossly divergent standards apply as the fairness control reflects divergent national conceptions of contractual fairness and a balance of rights and obligations under a contract. It might be thought that the idea of full harmonisation could be limited to the wording of the fairness test. Yet, in substance, this would not diverge from the present state of minimum harmonisation. Using a fundamental legal concept, such as full harmonisation in a grossly divergent way, however, leads to contradiction, misunderstanding and unavoidably gives rise to legal dispute. A full harmonisation of the grey and black lists is only possible if the general fairness test is substantially harmonised (above III.4.2). Such a model has no advantages: It helps neither traders nor consumers as no uniform set of rules can be used. Furthermore, it would not lead to a common legal language in Europe as misunderstanding is more likely if same terms are used in a divergent way. Drafting requirement: Art. 32 (1) Proposal remains unchanged. Art. 32 (1) Proposal: Without prejudice to Articles 34 and 38, the competent national authority shall assess the unfairness of a contract term taking into account (1) the nature of goods or services for which the contract was concluded, (2) all the other terms of the contract or of another contract on which the former is dependent; (3) the consequences of the term under the law applicable to the content. When assessing the fairness of a contract term, the competent authority shall also take into account the manner in which the contract was drafted and communicated to the consumer by the trader in accordance with Art. 31. Art. 4 (2) Proposal: Section one does not apply to the provisions of Art. 30 (3), 32 (3), 34, 35. Art. 30 (1) Proposal: This Chapter shall apply to contract terms drafted in advance by the trader or a third party, which the consumer agreed to without having the possibility of influencing their content, in particular where such contract terms are part of a pre-formulated standard contract. It is of no prejudice for Member State s provisions concerning individually negotiated terms. Art. 39 Proposal shall be abolished. Corresponding recitals should be modified as well. (3)A targeted full harmonisation of some aspects of unfair terms control appears to be feasible. The general fairness test and the grey and black lists of unfair terms, however, should be excluded from full harmonisation. The same is true for the exclusion of price control, the control of individually negotiated terms and of terms reflecting regulatory provisions. Hence, full harmonisation must be aimed at requirements such as the transparency test, interpretation, and enforcement. Whether full harmonisation is possible with regard to these provisions is, however, not the subject of the present briefing paper, which is focussed on the unfairness test. IP/A/IMCO/NT/ PE

37 Such a model can be recommended, however only as a second-best option. Basic arguments: See (2). Such a model is feasible. In comparison with a model, whereby full harmonisation is aimed at the other chapters, while the unfair terms control continues to be based on the principle of minimum harmonisation, the latter model is preferable. The full harmonisation of the aforementioned aspects is without benefit for either traders or consumers. Yet, it causes unnecessary complexity. Drafting recommendation: Art. 4 (2) Proposal: Section one does not apply to the provisions of Art. 30, 32, 33, 34, 35. Art. 39 Proposal shall be abolished. (4)Principal recommendation: The principle of full harmonisation should be targeted at provisions outside Chapter V only. The unfair terms control should be based on the principle of minimum harmonisation. Basic arguments: See (2) and (3). Drafting recommendation: Art. 4 (2) Proposal: Section one does not apply to Chapter V. Art. 39 Proposal shall be abolished. 2. Proposal and drafting recommendation concerning the unfair terms control in B2B contracts (5)Any form of full harmonisation of unfair-terms control in consumer contracts cannot prevent Member States from extending such protection to legal persons which are not consumers (scope of protection). Note: this proposition is independent of the other questions of full harmonisation of unfair terms control. Basic argument: The European Union s competence to regulate unfair-terms control is limited to consumer law. Drafting recommendation (subject to a more general limitation of the scope of consumer protection): Art. 4 (2)/(3) Proposal: Full harmonisation of Chapter V does not prevent Member States from extending the scope of protection to persons which are not consumers under Article 2 (1). Alternatively if this is meant to be provided for by Art. 3 (1) Proposal a clarification in a separate recital is recommended. IP/A/IMCO/NT/ PE

38 Concluding remark: In any event, a horizontal instrument would have to determine as clearly as possible which of these options (or which other option) is chosen. As the Proposal currently stands, however, this is not the case. A few examples might be taken to illustrate this point: - Art. 4, 30 (3) of the Proposal do not make a clear statement as to whether Member States shall be permitted to lay down mandatory rules, such as 276 (3) German BGB, which imply prohibitions on specific contract terms. - The Proposal does not make an explicit statement as to whether contract terms that are not individually negotiated may be regarded as unfair despite conforming to a Member State s non-mandatory legal provision. - The Proposal does not make a statement as to whether contract terms, which are regarded as fair under the general unfairness test, may nevertheless be held void by a national court on the basis that the individual circumstances of the conclusion of the contract amounted to some kind of undue influence or led to a mistake on the consumer s part. IP/A/IMCO/NT/ PE

39 Annex I Graphs IP/A/IMCO/NT/ PE

40 Graph 1 Number of Cases for main Directives on Consumer law (questions referred and failure to fulfill obligations for incorrect transposition) Dir 93/13 Dir 85/374 Dir 2005/29 Dir 85/577 Dir 87/102 Dir 90/314 Dir 97/7 Dir 99/ Dir 93/13: Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (minimum harmonisation) Dir 85/374: Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products (full harmonisation) Dir 2005/29: Directive 2005/29/EC of 11 May 2005 concerning unfair business-toconsumer commercial practices in the internal market (full harmonisation) Dir 85/577: Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises (minimum harmonisation) Dir 87/102: Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (minimum harmonisation) Dir 90/314: Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours (minimum harmonisation) Dir 97/7: Directive 97/7/EC of 20 May 1997 on the protection of consumers in respect of distance contracts (minimum harmonisation) Dir 99/44: Directive 1999/44/EC of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (minimum harmonisation) IP/A/IMCO/NT/ PE

41 Graph 2 Type of case-law for main Directives on Consumer law failure to fulfill obligation for correct 8 transposition failure to fulfill transposition obligation 6 questions referred Dir Dir Dir Dir Dir 93/13 Dir 94/47 Dir 97/7 Dir 99/44 Dir 85/374 85/577 87/102 90/ /29 IP/A/IMCO/NT/ PE

42 IP/A/IMCO/NT/ PE

43 Annex II Questionnaire for National Reporters IP/A/IMCO/NT/ PE

44 Questionnaire for National Reporters I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) Under your national system, does the unfairness test (from the Unfair Terms Directive 93/13/EEC) apply to negotiated terms? Does the statutory law, or case law, make a difference between negotiated and non-negotiated terms for the unfairness test? If yes, please give examples. (2) Under your national system, does the unfairness test (from the Unfair Terms Directive) apply to contract terms reflecting mandatory statutory or regulatory provisions? What would be the impact in your country of Article 30 (3) of the Proposal for a Directive on Consumer Rights (hereinafter proposed Directive )? For example, under some national law (like in France), the unfairness test can apply to terms of public or even private contracts which result from a regulatory provision. (3) Under your national legal system, does the unfairness test of the Unfair Terms Directive apply to contracts between business and persons who do not correspond to a natural person who is acting for purposes which are outside his trade, business, craft or profession? II. Impact on General Contract Law (4) Does your country s general contract law, or specific contract law (as law for sales), allow for devices alongside the rules on unfair terms control which can be used for controlling unfair contracts? Please think particularly about: a) Rules on terms that may directly or indirectly produce an imbalance in the parties rights and obligations b) Rules on illegality and bonos mores: In some countries such rules can be used for controlling unfair contracts, and also with regard to the price. c) General clauses on good faith: Specific terms might be regarded as contrary to good faith, even if not formulated in advance or as general contract terms. d) Rules on vitiated consent: Thus, in England, the rules on undue influence can be used for controlling possibly unfair contracts where close relatives intercede to guarantee the business liability of another family member. e) Mandatory rules specifically forbidding certain contract terms: Examples are the English prohibition on penalty clauses or the German rule that liability for intentionally inflicted harm cannot be excluded in advance ( 276 III Bürgerliches Gesetzbuch). IP/A/IMCO/NT/ PE

45 Please, give examples (your list needs not to be conclusive, though). Please pay attention not only to statutory law, but also to the jurisprudence of your courts. Would such rules possibly conflict with the rules on unfair terms control? Have there been such arguments made before? Do you think that a fully harmonised general clause would exclude the application of such rules? Please answer this question separately for the different options explained in our briefing paper. III. Price terms (5) Does the transposition of the Unfair Terms Directive in your national system include the restriction of Article 4 (2) of this Directive, i.e. the exclusion from the unfairness test of clear and intelligible terms defined the main subject matter of the contract or the adequacy of the price and remuneration compare to the services or goods? (6) Does your legal system acknowledge mechanisms of price control as envisaged, e.g. by Art. 4:109 PECL (excessive benefits and unfair advantages)? Are those instruments confined to price control, or can they also be used for controlling contract terms not determining the price? IV. Unfairness test (7) How do your national courts derive the criteria or standards for controlling the fairness of contract terms (Art. 3, 4 of the Unfair Terms Directive)? For example, is there an acknowledged legal basis, or does the decision lie solely with the judge? To which degree are courts able and / or prepared to rely on non-mandatory rules of contract law in this respect? (8) Under your national system, what exactly must be established to prove the unfairness? In particular, are there links, in your legislation and/or case law, between the significant imbalance in the parties' rights and obligations and the requirement of good faith? V. Black and grey lists (9) Does your national law lay down lists of terms considered unfair in all circumstances, and/or lists of terms presumed to be unfair? If your answer is positive, please describe this list if it is not included in the translation (see below). How, if at all, does this list differ from the lists given in Annexes II and III of the proposed Directive? (10) Does your national legal system contain non-mandatory contract-law rules which might be difficult to reconcile with the proposed Directive s grey and black lists? (11) In which form do your courts specify the meaning of a general clause against unfair contract terms? Especially: do the courts formulate more or less general prohibitions on specific contract terms, which could be reconstructed as judicially formulated black or grey lists supplementing the existing Directive s (and thus also the Proposal s) lists? Or is the assessment of a contract term s fairness always (or at least usually) based on the individual circumstances in which it was applied, alone? Please, think IP/A/IMCO/NT/ PE

46 especially about cases where legal proceedings are brought not by an individual consumer, but rather by a consumer organisation or another agency that is competent to challenge standards terms under Art. 7 (2) Unfair Terms Directive. Explanatory note In legal practice, black and grey lists of unfair terms are not only laid down by the legislator. Prohibitions of specific unfair terms are also formulated perhaps even to a larger extent by the courts interpreting the general clauses. Indeed, when a court is confronted with a specific contract term, it will usually decide whether such terms are generally regarded as fair or unfair. This is especially the case where legal proceedings are brought not by an individual consumer, but rather by a consumer organisation or another agency that is competent to challenge standards terms under Art. 7 (2) Unfair Terms Directive (Art. 38 (2) Proposal). Normally, such judicial prohibitions are collected in commentaries or other forms of legal literature. From the point of view of businesses and consumers, it makes no difference whether a specific prohibition has been expressed by the legislator or by the courts. VI. General Question: (12) Looking at your legal system, can one assume that most consumer contracts are based on standard terms of contract law and are decided in the context of unfair contract terms control? Would you therefore expect that the future development would have to be controlled by the CJEU if the control of unfair contract terms is fully harmonised? If available, please attach a copy of the English translation of your country s relevant legislation on unfair terms transposing the Unfair Terms Directive and any other legislation you refer to in your report. In any case, please attach a copy of this legislation in your native language. IP/A/IMCO/NT/ PE

47 Annex III National Reports IP/A/IMCO/NT/ PE

48 Table of Contents Cyprus...43 Denmark...46 France...52 Germany...60 Poland...66 Portugal...73 Romania...78 United Kingdom...86 IP/A/IMCO/NT/ PE

49 Cyprus Nikitas E. Hatzimihail Introduction Cyprus is a mixed legal system. Most of private law, including the law of contracts, actually follows the English common law (public law has a Continental orientation). Absent statutory provisions to the contrary, common law constitutes a source of Cyprus law (as far as private law is concerned). Comprehensive statutes exist nonetheless in all traditional fields of private law, including contract. Statutory interpretation is influenced by Continental, as well as English ideas and the constitutional discourse establishes a rigid hierarchy of sources. 49 The Republic s official languages are Greek and Turkish. As long as Turkish occupation of the northern part of the country continues, iure necessitatis Greek is the sole language of court practice and pleadings. English is widely used in contract drafting. Most of the material used in legal argumentation is in English. The basis of Cyprus contract law is the Contract Law Cap It was promulgated in the 1930s, but it constitutes a transplantation of the Indian Contract Act from the 1870s. It is to be interpreted in accordance with English law (Art. 2). The Sale of Goods Law of 1994 is modelled after the English Sale of Goods Act It must be noted here that, even though English common law forms part of Cyprus law, and English reference works are used in contract law, such consideration does not extend to legislative amendments of the common law after independence (or prior to independence, if not made directly applicable in Cyprus at that time). In my own teaching of general contract law, I make an effort of acquainting students with the use of vitiation doctrines to promote consumer protection, but the level of acquaintance with modern developments in the English common law is relatively limited, even though many lawyers have been educated in British law schools. Cyprus became an EU member State in Implementation of EU directives takes place by statute and tends to rely on Greek and English sources. The legislative framework of consumer protection in Cyprus corresponds exactly to the European directives: there exists no separate legislation, as in the United Kingdom, or a comprehensive consumer code, as in Greece. The first piece of Cyprus consumer legislation was the Unfair Clauses in Consumer Contracts Law of 1996 [L. 93(I)/1996: ο περί Καταχρηστικών Ρητρών σε Καταναλωτικές Συμβάσεις Νόμος του 1996]. It implements the Unfair Contract Terms Directive 93/13/EC. It has been subsequently twice amended (1999; 2007) on administrative aspects. I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) The Unfair Terms in Consumer Contracts Law is applicable to contracts not individually negotiated : Art. 3(1). Arts 3(3) and (4) transpose the Directive s 3(2): any term which was drafted in advance, the consumer therefore not being able to influence the substance of the term, iregardless of any effort by the consumer to that purpose, is not individually negotiated ; the Law is still applicable to the rest of the contract despite the fact that certain aspects of a term or one specific term have been individually negotiated, 49 See especially Symeon Symeonides, The Mixed Legal System of the Republic of Cyprus, 78 TULANE L. REV. 441 (2003); Nikitas Hatzimihail, Cyprus as a Mixed Legal System in HYBRID LEGAL TRADITIONS: COMPARATIVE AND ME- THODOLOGICAL CONSIDERATIONS (Lausanne, 2010). IP/A/IMCO/NT/ PE

50 if the overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract. The seller/supplier bears the burden of proving that a term was individually negotiated. (2) No. The exception is stated in Art. 4(e)(i). (3) No. Article 2 of defines consumer in the same manner as the Directive s Article 2. II. Impact on General Contract Law (4) As I am mentioning in the Introduction, Cyprus contract law consists of a nineteenth-century open codification of the common law of contract, a rather recent Law on sales based on the English Sales Act and is generally the same as the English common law of contract. Cyprus contract law includes all English common-law devices, such as illegality and vitiated consent (especially undue influence, economic duress). Art. 28 of the Contract Law Cap 149 prohibits agreements restrictive of a party s access to courts. Arbitration is allowed under general contract law, but there no practice of, or statutory basis for, consumer arbitration in Cyprus. I would refer you to the discussion of undue influence and duress in the English national report, and I would also share that Report s conclusion with regard to the limited role of unconscionability (as opposed to Australia and, I would add, the U.S.). Arts. 16 and 15 of the Contract Law Cap 149 deal with undue influence and duress/coercion (though not unconscionability). I must note that the definitions of both allude to 19 th -century standards, and the Greek translation of the term undue influence (ψυχική πίεση) sounds restrictive. But English doctrine on undue influence is part of the law of the land. It must be noted that there very few appellate cases on undue influence and duress, none of which has involved consumer contracts. Similar to English law, Cyprus contract law distinguishes between penalty clauses and liquidated damages clauses: Art. 74 of the Contract Law Cap. 149 however tends to be interpreted more restrictively than the English penalty-clause doctrine. With regard to consumer credit, Consumer Credit Law 39(I)/2001 is applicable. Regulation of consumer credit has aroused more interest from parliamentarians than unfair contract terms and the Law has been amended several times. III. Price terms (5) Yes: Article 3(2). (6) No. IP/A/IMCO/NT/ PE

51 IV. Unfairness test (7) The Unfair Terms in Consumer Contracts Law provides interpretative criteria in Art. 5(1) and especially 5(2), on the basis of the Directive s provisions in Art. 3(1) and Art. 4(1) respectively. Art. 5 represents the first substantive provision of the Law, so from a systemic point of view the importance of these provisions is underlied. There is no case law which could help us determine how judges use these criteria. I have also found no evidence of courts taking account of soft law initiatives, such as PECL, are concerned: I have personally found them useful in class, and it would be great to have them available in Greek. They have not been used in courts, principally because they are not known. We are working to change that, gradually. (8) A general concept of objective good faith does not exist in the common law of contract. Good faith has nonetheless become part of English contract law through European consumer law instruments. I would refer to Director General of Fair Trading v. First National Bank [2002] 1 AC 481 (House of Lords, 2001) as persuasive authority. V. Black and grey lists (9) The Law includes an Annex, pursuant to the Law s Art. 5(4) which effectively reproduces verbatim the list of the Unfair Terms Directive. No other list of consumer terms exists in Cpyrus law. (10) I cannot think of any. (11) Consumer law is a relatively new field in Cyprus. There is no literature and I have found no pertinent material in appellate case law. This situation is beginning to change: consumer organizations have begun to take a more active role in recent years, and consumer-protection litigation will expand. The governmental Competition and Consumer Protection Service is also beginning to take a more active interest. VI. General Question: (12) Most consumer contracts are indeed based on standard terms. Even utilities companies make use of terms which would be easily held in violation of the Unfair Terms in Consumer Contracts Law. The European Court of Justice would by definition play an important role in the case of fuller harmonisation. It is hoped that the development of contracts doctrine in Cyprus and the mobilization of governmental and volunteer agencies will contribute to the effective implementation in market practice. IP/A/IMCO/NT/ PE

52 Denmark Peter Møgelvang-Hansen General remarks The general clause in section 36 of the Danish Formation of Contract Act was added to the Act by amendment act no. 250/1975. It offers a contract party protection adjusted to the particular circumstances of the individual case where there is a need to avoid unreasonable results that cannot be met by means of interpretation or other rules or principles of contract law. The general clause thus serves the function of a supplement to the rather precise, traditional rules of voidability which were not considered flexible enough to secure sufficiently well balanced solutions in all cases According to section 36 the courts can, in whole or in part, disregard an agreement if it would be "unreasonable or contrary to principles of fair conduct" to enforce it. The decision can rely not only on the circumstances surrounding the formation of the contract, but also on its content and on subsequent circumstances. The general clause applies to contracts in general, including B2C and B2B. All types of contract terms are within the scope (including individually negotiated terms) and certain terms such as e.g. the main subject matter and the remuneration are not excluded. The criterion of section 36 is considered flexible enough to allow such differences to be taken into account to the extent it is appropiate in view of the facts of the individual case. Accordingly the application of section 36 by the courts is very far from being an everyday occurrence as far as commercial contracts are concerned but cannot be ruled out in areas where there is a considerable difference in bargaining power between commercial parties to a contract, or in extraordinary cases, beyond what can be considered actualization of commercial risks. An even higher degree of flexibility was achieved by amendment act no. 1098/1994 to the effect that the agreement can also be amended. This can be of importance, inter alia, in the case of long-term contracts containing pecuniary remuneration that has gradually grown unreasonably low and where a setting aside of the contract (in whole or in part) would be disproportionate. In order to make sure that directive 93/13/EEC was implemented properly the general clause was slightly adjusted by amendment act no. 1098/1994 as far as consumer contracts are concerned. Cf. section 38c of the Formation of Contract Act adding some minor rather technical modifications to section 36. The present rules are found in consolidated act no. 781/1996. The general clause of section 38c, cf. section 36 protects consumers to a wider extent than directive 93/13/EEC. The criterion of the general clause is unreasonable or contrary to principles of fair conduct without the qualifications mentioned in art. 3 of the directive (i.e. contrary to the requirement of good faith and a significant imbalance) and without any restrictions concerning the price etc. as mentioned in art. 4(2) of the directive. Furthermore, in contrast to art. 4(1) of directive, also subsequent facts can be taken into account in favour of the consumer (but not to the detriment of the consumer, cf. section 38c(2)). Rules on preventive control of unfair contract terms were introduced also in 1975 when the first Marketing Practices Act became effective. The rules are now found in consolidated act no. 839/2009. IP/A/IMCO/NT/ PE

53 The scope of the general clause of section 1 ( good marketing practices ) includes the use of contract terms in consumer contracts. Although the wording of section 1 does not specifically deal with the question the provision, in accordance with the preparatory works of the Act, is interpreted as a means to regulating inter alia unfair contract terms in consumer contracts. Whereas section 36 of the Formation of Contract Act concerns the reasonableness of enforcing a contract term in a given concrete dispute between individual parties, section 1 of the Marketing Practices Act concerns the use of a contract term in future contracts of a certain type. The difference implies that the assessment under the Marketing Practices Act to a wide extent deals with the expected typical effects of the contract terms compared with the expected typical effects if the contracts were instead "filled out" with the statutory and non-statutory default rules of the general contract law which are generally assumed to express what is a fair balancing of the parties' loyal interests in typical situations. As far as the preventive control aspects of directive 93/13/EEC, cf. art. 7 of the directive, are concerned it needed no special implementation instruments since it was already implemented by The Marketing Practices Act 1 which is considered to enable a more extensive protection of consumers than does the directive. I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) The same rules apply to negotiated and non-negotiated terms. The criterion of the general clause of the Formation of Contract Act is flexible enough to allow that it is taken into account in pertinent cases if the terms in question were individually negotiated. (2) The general clauses of the Formation of Contract Act and the Marketing Practices Act also apply to the terms of contracts made with public authorities. See section 2(1) of the Marketing Practices Act. In the preparatory works of the act implementing directive 93/13/EEC, cf. act no. 1098/1994 amending the Formation of Contract Act, an exception of terms reflecting mandatory statutory or regulatory provisions would have no practical impact. A rule to this effect was therefore not included in the act. Nothing seems to indicate that a statutory exception of terms reflecting mandatory statutory or regulatory provisions would have greater practical impact in the future. Art. 30(3) of the proposed directive would therefore probably have no practical impact in Denmark. (3) With the few minor differences, the criterion of the unfairness test under the Formation of Contract Act is the same in B2C contracts (cf. section 38 c, cf. section 36) and other contracts, including B2B (cf. section 36). The criterion is flexible enough to allow the relevant differences between B2B and B2C to be taken into account when the individual case is decided. Cf. general remarks (above). IP/A/IMCO/NT/ PE

54 II. Impact on General Contract Law (4) Up to 1975 (when the general clause of the Formation of Contract Act was introduced) the main legal instruments against unfair contract terms in consumer contracts were the general non-statutory principles on incorporation and interpretation of contract terms, including the rather vague general non-statutory principles of loyalty between contract parties, of proportionality, and of abuse of rights. For instance, also prior to 1975 a contract term limiting the obligation of a party to pay damages for breach of contract generally had no legal effect in case of gross negligence or intent, and contractual terms to the effect that a contract party should only be entitled to repair in case of nonconformity of the goods or the service in question generally could not exclude the remedy of termination or damages if the repair did not take place within reasonable time etc. Since the general clause of the Formation of Contract Act was passed in 1975 the setting aside of unfair contract terms has been explicitly authorized by the legislation. It seems reasonable to assume that this has had the effect that in cases where the courts may be in doubt of how far they can go in applying the non-statutory rather vague general principles mentioned above in order to avoid unreasonable results there has been and is a general tendency to find support in the general clause instead of the non-statutory general principles. At any rate, since 1975 the distinction between the non-statutory principles mentioned above and section 36 of the Formation of Contract Act and accordingly the scope of non-statutory principles vis-à-vis the general clause has been blurred. Important types of consumer contracts and/or contract terms are governed by mandatory legislation defining a rather precise minimum of protection of the consumer. Statutory rules to this effect are found not only in the various acts implementing the relevant minimum directives on consumer protection, e.g. the Sale of Goods Act, the Act on Certain Consumer Contracts (concerning distance selling, door to door sales etc.), and the Credit Contracts Act. Rather precise mandatory rules protecting (i.a.) consumers are also found in e.g. the Insurance Contracts Act, cf. consolidated act no. 999/2006. This act contains detailed default rules and detailed mandatory rules on insurance contracts protecting as a main rule all customers (i.e. consumers as well as non-consumers) against contract terms that do not meet a certain minimum of protection of the customer. Other examples are found in the Financial Business Act (consolidated act no.793/2009) section 48 containing some mandatory rules protecting the consumer in surety commitments with banks and in the Act on Certain Consumer Contracts (act no. 451/2004 as amended by act 492/2009) section 25 protecting consumers against terms in contracts concerning the continuing delivery of goods or services for an indefinite period by giving the consumer a general right to terminate the contract with one month's notice when five months have passed since the conclusion of the contract. According to section 7(2) of the Arbitration Act (no. 553/2005) a consumer is not bound by an arbitration agreement made before the dispute arose. The examples of precise protective mandatory legislation seem to a wide extent to be within the scope of chapter V of the proposed directive in so far as they regulate terms in consumer contracts. They protect consumers by defining a minimum of protection and thus stipulating that all contract terms below this level of protection are not binding on the consumer no matter the circumstances. IP/A/IMCO/NT/ PE

55 This seems to be contrary to the proposed directive, cf. art. 32, 34 and 4, so that the mandatory rules could not be upheld in so far as they concern consumer contracts (whereas the mandatory rules of the Insurance Contract Act would not be affected as far as the protection of non-consumer customers is concerned). III. Price terms (5) No terms are excluded from the test. See general remarks above. (6) A rule to this effect is found in the Formation of Contract Act section 31 concerning exploitation of financial or personal distress, lack of knowledge, thoughtlessness or an existing dependency relationship to obtain or contract for a benefit that is substantially disproportionate to the consideration or for which no consideration is to be given. Section 31 is not confined to price control. As mentioned above the adequacy of price etc. is not excluded from the unreasonableness test of the general clause in section 36. Cf. e.g. the Western High Court case reported in Ugeskrift for Retsvæsen 1987 p. 699, where an increase of the interest rate authorized in a bank's contract terms concerning a student's loan was set aside by the court according to section 36 and the interest rate lowered. IV. Unfairness test (7) The unreasonableness test according to the general clause of the Formation of Contract Act is an overall assessment of the facts of the individual case, including the content of the contract, the formation of the contract, and subsequent circumstances (in so far they are in favour of the consumer, see general remarks above for details). The default rules of contract law are important factors as far as the assessment of the content of the terms is concerned. The general rules and principles of contract law are generally assumed to express what is a reasonable balancing of the parties' loyal interests in typical situations. Among the more general factors influencing the reasonableness test are the non-statutory principles of loyalty between contract parties, of proportionality and of abuse of rights, factors that can also be seen as integral parts of the default rules. Cf as an illustration the judgment reported in Ugeskrift for Retsvæsen 2002 p.706 where the Supreme Court set aside a contract term authorizing the seller to charge 10% of the contract price in case of cancellation of the consumer's purchase of a car. The decision was founded in the fact that in cases concerning the buyer s breach of a sale contract concerning a used car it is generally not possible for the seller to prove a loss of profit etc. recoverable as damages according to the Sale of Goods Act. On this background, the said 10% - clause would often lead to the result that the buyer be obliged to pay a disproportionately high sum in compensation to the seller. Therefore, the term was unreasonable according to 38 c, cf. 36 of the Formation of Contract Act, see also 1,(e) i the Annex to art. 3 in Directive 93/13/EEC. Given the fact that the unreasonableness test in the context of preventive control concerns the expected typical effects of the contract term in question (se general remarks above) the default rules of contract law are likely to play an even more important role in IP/A/IMCO/NT/ PE

56 cases dealt with in the context of preventive control according to the Marketing Practices Act. Thus, terms deviating from mandatory provisions of the general or special contract law defining the minimum rights of consumers are in all circumstances contrary to good marketing practices. Also non-mandatory statutory and non-statutory rules and principles of contract law are considered to define a fair balance between the contracting parties and should, generally speaking, normally only be deviated from to the detriment of the consumer if the special circumstances of the contract substantiate that the term represents a reasonable balancing of the interests of the respective parties. Furthermore, it is normally considered contrary to good marketing practices to use contract terms which counteract transparency or can have an irrelevant influence on the decision to purchase. (8) See answer to question 7 and the general remarks (above) V. Black and grey lists (9) There are no such lists. (10) No. (11) A decision concerning the binding effect of contract terms made under the general clause in the Formation of Contract Act is the result of an overall evaluation of the circumstances of the individual case. Although this fact often leaves its mark on the way decisions are formulated, decisions in cases where the main emphasis is on the content of the contract term in question often send a clear message that can easily be "translated" into at least a general presumption of unfairness. Cf. e.g. the Supreme Court judgment reported in Ugeskrift for Retsvæsen 2002 p. 706 (see above under (7)). Decisions made under section 1 of the Marketing Practices Act on the preventive control in nearly all cases deal with the general unfairness of the term in question in future contracts within a certain line of business. The court decisions are formulated as prohibitions against the trader's future use of the term and can thus easily be reconstructed as items on a "black" list and/or a "grey" list. In practice, the cases are brought before the courts by the Consumer Ombudsman according to the Marketing Practices Act section 27. The number of court decisions is not big. Most cases are solved by negotiation and/or issuance of guidelines or advance indications. Cf. the Marketing Practices Act sections VI. General Question: (12) Important types of consumer contracts and important general aspects of a variety of other consumer contracts are governed by mandatory legislation defining a rather precise minimum of protection of the consumer, see above under (4). The Sale of Goods Act, by and large, reflects the non-statutory, general principles of contractual obligations and the rules of the Act, with a few exceptions consisting mainly of rather "technical" rules, is an important paradigm for the non-statutory default rules applicable to those types of contracts that are not dealt with in the legislation, for example most service contracts. IP/A/IMCO/NT/ PE

57 As far as contracts not governed by protective mandatory legislation are concerned the general clauses of the Formation of Contract Act and of the Marketing Practices Act are the most important legal instruments for protection of consumers. However, also in these areas the protective mandatory legislation and the general default rules serve important functions as starting points for the unfairness assessments. The interplay between the general clause and the default rules, including the paradigm function of the protective mandatory legislation, is thus important for the proper and effective functioning of the vague general clauses as means of protecting consumers against unfair contract terms, cf. above under (4) and (7), and should not be underestimated. IP/A/IMCO/NT/ PE

58 France Denis Mazeaud & Natacha Sauphanor-Brouillaud I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) Article L paragraph 1 of the consumer Code outlines the scope of consumers protection against unfair terms without taking into account whether the contract in which a term was stipulated was freely negotiated. In fact, this text refers to contracts concluded between professionals and non-professionals or consumers. Therefore, it does not distinguish between freely and not freely negotiated contracts. The protection is thus only triggered by the existence of a significant imbalance. Therefore, when a judge is asked to prevent continued use of an unfair term, he does not have to seek first whether the contract was freely negotiated. (2) The April, 5th 1993 Directive did not apply to those terms. The minimal harmonisation clause of the 1993 Directive enabled the French legislator not to apply this exclusion. Since the Conseil d Etat case Société des eaux du Nord, July 11th, 2001, the administrative Judge expressly applies the unfair terms legislation to statutory terms (CE, July 11th, 2001, Société des eaux du Nord, req. n ). French law is, on that matter, more protective than the proposed Directive. (3) Article L paragraph 1 provides that «in contracts concluded between a professional and a non-professional or consumer, clauses which aim to create or result in the creation, to the detriment of the non-professional or the consumer, of a significant imbalance between the rights and obligations of the parties to the contract, are unfair.». 4 propositions can be drawn from this text: 1 ) This text applies to the consumer, natural person. 2 ) This text applies to legal persons that do not contract as professionals, via the «non professional» notion (Cass civ. 1ère, March 15th, 2005, Bull. civ. I, n 135). 3 ) This text can apply to a professional party, legal or natural person, where there is no direct link between their professional activity and the contract containing the litigious term. (Cass. civ. 1ère, January 24th, 1995, Bull. civ. I, n 54). 4 ) Regardless of article L of the consumer Code, some professionals are protected against unfair terms under article L 442-6, I, 2 of the commercial Code in terms similar to the consumer Code: Any producer, seller, supplier, manufacturer or person registered at the Trade Directory ( personne immatriculée au repertoire des metiers ) who subjects or tries to subject a contracting party to obligations creating a significant imbalance in the parties rights and obligations will be held liable for damages. IP/A/IMCO/NT/ PE

59 II. Impact on General Contract Law (4) a) In French law : Economic duress ( violence économique ), judge-made rule broadening the notion of duress (civil Code, art. 1112), states that the unfair use of a situation of economic dependency in order to take advantage of the fear of a harm directly threatening the legitimate interests of a person constitutes economic duress and negates genuine consent (Cass. civ. 1ère, April 3rd 2002, Bull. civ. I, n 108). It indirectly protects the weak party against excessive imbalances. This rule does not conflict with a general clause regarding protection against unfair terms, be it of maximal harmonisation, since those two rules do not have the same rationale, the same object and the same objective. In fact, the rule on economic duress protects the freedom of consent whereas the clause protects contractual balance. There is another classic notion, la cause objective (civil Code: art. 1131), that protects the private interests of a party against a structural imbalance, i.e. against an obligation taken without consideration or for an insufficient or insignificant consideration. This rule does not conflict with a general clause regarding protection against unfair terms, be it of maximal harmonisation, since those two rules do not have the same rationale, the same object and the same objective. The notion of cause objective controls a minimum of balance in the main contractual obligations (price, value, remuneration) whereas the general clause protects secondary terms from excessive imbalances (power clause, termination clause etc ). The notion of faute lourde is another notion used by the courts. It can protect a party against a significant contractual imbalance. For example, a term disclaiming liability and depriving the creditor victim of a contractual damage of any compensation can be taken out of the contract if the debtor relying on it has committed a faute lourde. The courts definition of a faute lourde is an extremely serious misconduct showing the debtor s incapacity to perform his obligation. This rule does not conflict with a general clause regarding protection against unfair terms, be it of maximal harmonisation, since those two rules do not have the same rationale, the same object and the same objective. The rule on lésion allows, for certain contracts (sale and contracts concluded by persons lacking capacity) to set aside or revise the contract containing an excessive imbalance in the main obligations of the parties (civil Code, articles 1118, 1683; articles 1304 and following). b) In French law, the notion of bonnes moeurs does not allow to control the significant imbalance of a contract. However, the notion of illegality ( illicéité ) is useful against illegal terms. For instance, according to article 2061 of the civil Code, an arbitration clause is void in consumers contracts since it is illegal. IP/A/IMCO/NT/ PE

60 This rule from the civil Code conflicts with article R 132-2, 10 of the consumer Code providing that in contracts concluded between professionals and nonprofessionals or consumers, terms that the object or effect of ( ) 10 excluding or limiting the consumer s legal rights, especially by forcing them to refer only to a court of arbitration not legally organised or by forcing them to only resort to an alternate dispute resolution are supposed to be unfair according to the first and second paragraphs of article L132-1, unless the professional can prove the contrary. The problem is to know if a consumer is entitled to a legal action to set aside an arbitration clause under the civil Code that protects him better than consumer law. c) According to a recent case (Com. July 10th, 2007, Bull. IV, n 188), «the rule providing that contracts must be executed in good faith (civil Code: art. 1134) allows judges to punish the unfair use of a contractual prerogative, but it does not allow them to modify the very core of the rights and obligations legally determined by the parties. Therefore, a term that would create a significant imbalance between the rights and the obligations can be set aside because of the bad faith of the party invoking it. This rule does not conflict with a general clause relating to protection against unfair terms, be it of maximal harmonisation, since those two rules do not have the same rationale, the same object and the same objective. d) Some rules relating to consent can have the effect of indirectly controlling the contractual balance (misrepresentation, duress for economic duress, see above), via a liability claim. Because their object is to ensure a free and intelligible consent, those rules do not conflict with a general clause relating to protection against unfair terms, be it of maximal harmonisation. e) Certain mandatory rules prohibit some terms. For instance, arbitration clauses (see above) or terms letting a party decide whether his obligation is mandatory ( condition purement potestative : art of the civil Code). In French law, this civil Code rule conflicts with article R 132-2, 1 of the consumer Code: In contracts concluded between professionals and non-professionals or consumers, according to the first and second paragraphs of article L132-1, terms which have the object or effect of: 1 making an agreement binding on the non professional or the consumer, whereas the professional s performance of his obligation is subject to a condition whose realisation depends on his own will alone are supposed to be unfair unless the professional can prove the contrary. According to the civil Code, such a term is void, and so is the whole contract, whereas the consumer Code allows maintaining the term if it is shown that it does not create a significant imbalance. III. Price terms (5) In French law, article L132-1 paragraph 7 provides that: «In contracts concluded between professionals and non professionals or consumers, terms that have the object or effect of creating a significant imbalance between the parties rights and obligations to the detriment of the non professional or consumer are unfair ( ) IP/A/IMCO/NT/ PE

61 To assess the unfairness of a term in the meaning of the first paragraph one should not look at the main object of the contract, nor at the adequacy of the price or remuneration as against the good or service supplied in exchange, provided the terms are written in a plain and intelligible language. Therefore, unless the term is unclear, it is not possible to control the contractual price. (6) French law does not have a rule similar to article 4: 109 PECL. However, thanks to the Cour de Cassation s caselaw, price can be controlled either via the notion of cause that allows to annul contracts concluded for an insufficient price, or via the notion of unfairness that allows to terminate long-term contracts whose price was unilaterally fixed by one of the parties; or via the notion of equity for the excessive remuneration of agents, members of liberal professions and business agents. The notion of cause allows for a broader control of the contractual balance than the one operated by the adequacy of the price as against the value of the good or service supplied. It can indeed be used to protect a party against any sort of contractual imbalance (see above). IV. Unfairness test (7) To assess the unfairness of a term, judges can, according to article L 132-1, refer to the rules of interpretation of articles 1156 to 1161, 1163 and 1164 of the civil Code. They can also take into account any circumstance surrounding the conclusion of the contract. They can refer to every term in the contract as well, or to terms contained in other contracts where the conclusion or the performance of both contracts are legally bound. There is no criterion on which judges can officially base their decision to find that an unfair term is void. However, there is an unfair terms Commission which regularly gives recommendations that can inspire their decision. But those recommendations are not legally binding on judges or parties. Furthermore, judges must demonstrate the unfairness of the term in their decision and not just point to a recommendation. (8) See the answer to Question 7. V. Black and grey lists (9) In French law, there is a black list (art. R ) and a grey list (art. R ) of unfair terms. There are differences that are listed in tables (see below) and in D. Mazeaud s article, Regards français sur les dispositions relatives aux clauses abusives (see excerpts below). 7. La régression de la protection des consommateurs contre les clauses abusives que provoquerait la substitution du droit européen au droit français procéderait, en premier lieu, de la disqualification de certaines clauses par la proposition de directive. «Disqualification», dans la mesure où des clauses qui figurent aujourd hui dans la liste noire française sont reléguées dans la liste grise européenne, ce qui emporte nécessairement un déficit de protection. Trois clauses émargent dans cette rubrique : IP/A/IMCO/NT/ PE

62 - D abord, celle qui accorde au seul professionnel le droit de modifier unilatéralement les dispositions contractuelles relatives à la durée, aux caractéristiques ou au prix du bien à livrer ou du service à rendre (a. R , 3 ). Cette clause n est pas reprise dans la liste noire européenne, elle est indirectement intégrée dans la liste grise, via une clause (annexe III, k) ) dont l objet est plus large et constitue par ailleurs la réplique de la clause grise visée par l a. R , 6. - Ensuite, la clause qui neutralise l exception d inexécution au profit du professionnel en ca de manquement de celui-ci à ses obligations de délivrance ou de garantie d un bien ou à son obligation de fourniture d un service (a. R , 5 ). Reléguée dans la liste grise européenne (annexe III, h) ) la protection a cependant un domaine plus large puisqu elle vise toutes les clauses qui neutralisent l exception d inexécution du consommateur, quel que soit l objet du manquement contractuel imputable au consommateur. - Enfin, la troisième clause disqualifiée est celle qui accorde au seul professionnel le droit de rompre discrétionnairement le contrat (a. R , 8 / Annexe III, d) ). [ ] 12. Outre une protection de la progression qui procède d une meilleure qualification de certaines clauses, la proposition de directive améliore le sort des consommateurs confrontés à une clause abusive grâce à une meilleure neutralisation de clauses particulièrement dangereuses pour ce dernier. Ainsi, le législateur européen a très opportunément intégré dans sa liste noire toutes les clauses qui ont pour objet ou pour effet d exclure ou de limiter l action en justice et l exercice des voies de recours (Annexe I, c) ), clauses qui ne figurent que dans la liste grise française (a. R , 10 ), alors qu elles sont susceptibles de porter une très grave atteinte à la protection du consommateur. Et il en va de même pour les clauses qui limitent au profit du professionnel les moyens que le consommateur peut utiliser en vue d administrer la preuve de l existence ou de la consistance de ses droits envers le professionnel. Une fois encore, au regard de leur dangerosité pour le consommateur, le législateur européen a fait le bon choix en les intégrant dans sa liste noire (Annexe I, d) ), tandis que le législateur française en les faisant figurer que dans sa liste grise ( a. R , 9 ) n a pas mesurer leur nocivité potentielle. Après avoir mené cette petite étude comparative des régimes européens et français de protection des consommateurs contre les clauses abusives, pour permettre à chacun d apprécier les effets que produirait sur cette protection la substitution du premier au second, il est temps, toujours dans cette même perspective, d entreprendre la comparaison des domaines européen et français de lutte contre les clauses abusives. (10) There are no auxiliary rules in French law that would be hard to reconcile with the dispositions of the Directive s black and grey lists. (11) Some criteria are used in the caselaw to determine the validity of a term that is not in one of those lists. One of them is frequently used: the unilateral nature of the power granted by the term to the professional party regarding the contract s formation, validity or termination. The other one is the advantage given to the professional without any reciprocity. Consumers associations can take legal action when terms are stipulated in contracts usually destined to professionals. Judges assessment is more concrete and detailed than when the action is brought by a consumer for an individual case. By assumption, the assessment is more abstract when the action brought by a consumers association only aims for a preventive and collective decision. IP/A/IMCO/NT/ PE

63 VI. General Question: (12) Most of the contracts concluded by consumers with professionals are not only standardised contracts but also adhesion contracts. They are unilaterally and massively prewritten by the professional party and are not negotiated with the consumer. To conclude, it seems more balanced to us, for the protection of both the consumer s and the professional s interests, that only the unfair terms that have not been freely negotiated be voidable. However, such a rule relating to protection is not acceptable unless it is completed by another one. This second rule should state a presumption according to which if the professional alleges that a contractual term has been negotiated individually, he bears the burden of proving it (art. 33 of the proposed directive). IP/A/IMCO/NT/ PE

64 Differences between black and grey French lists and Annexes II and III of the proposed Directive French black list and Annex II of the proposed Directive Art. R Consumer code Art. R , 2 Art. R , 12 Annex II b) limiting the trader's obligation to respect commitments undertaken by his agents d) imposing on him a burden of proof which, according to the applicable law, should lie with the trader Art. R , 4 e) French black list and Annex III of the proposed Directive Article R Consumer code Annex III Art. R , 6 a) Art. R , 3 k) Art. R , 5 h) Art. R , 8 d) French grey list and Annex II of the proposed Directive Article R Consumer code Annex II Art. R , 9 e) Art. R , 1 b) Art. R , 10 c) IP/A/IMCO/NT/ PE

65 French grey list and Annex III of the proposed Directive Art. R Consumer code Annex III Art. R , 2 b) Art. R , 3 c) Art. R , 4 e) with some differences with the annex which limit the unfair terms in the terminate an open-ended contract Art. R , 5 i) Art. R , 6 k) Unfair contract terms in French black list which do not exist in proposed Directive Art. R Consumer code Art. R , 1 Art. R , 7 Art. R , 9 Art. R , 10 Art. R , 11 Unfair contract terms in French grey list which do not exist in proposed Directive Art. R Art. R , 7 Art. R , 8 Unfair contract terms in the proposed Directive which do not exist in French Consumer law Consumer code Annex III f) j) l) IP/A/IMCO/NT/ PE

66 Germany Oliver Remien I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) The general unfairness test of the directive finds its implementation in 307 par. 1 BGB. This is the general clause of Inhaltskontrolle i.e. review or control of contents for general conditions of business or standard business terms. According to this norm, it only applies to general conditions of business (Allgemeine Geschäftsbedingungen) as defined in 305 par. 1 BGB, but according to 310 par. 2 no. 2 BGB in case of contracts between a businessperson and a consumer 307 also applies in case of pre-formulated conditions of business which are used only once. Thus, the general unfairness test of the directive does not apply to negotiated terms. In fact, in the section defining general conditions of contract (i.e. 305 par. 1 BGB) the third sentence expressly makes clear that individually negotiated terms are not considered general conditions of business. Thus, there is a clear statutory difference between negotiated and non negotiated terms. But of course negotiated terms can in certain cases be invalid because they are in conflict with a specific mandatory norm or are contra bonos mores in the sense of 138 BGB. (2) 307 par. 3 sentence 1 says that the provisions on contents control ( Inhaltskontrolle ) only apply to general conditions of business laying down rules which deviate from or complement the rules of law. Thus, a provision in general conditions of business which reflects a mandatory (or dispositive) statutory or regulatory provision is not subject to this test. However, the test nevertheless applies where the provision in general conditions of business is not clear and comprehensible, 307 par.3 sentence 2 BGB (3) The unfairness test of 307 BGB applies to all general conditions of business irrespective of the status of the one or the other of the parties to the contract. Thus, in case of general conditions of business there is an unfairness test also for commercial contracts or private law contracts without any businessperson/consumer confrontation. The reason often given for this rule is an economic on, namely that in case of general conditions of business the parties generally do not negotiate the details of pre-formulated conditions and with a view to transaction costs also should not be expected to do so (see already Kötz, Welche gesetzgeberischen Maßnahmen empfehlen sich zum Schutze des Endverbrauchers gegenüber Allgemeinen Geschäftsbedingungen und Formularverträgen?, in: Verh. 50. DJT (1974) Gutachten A, A 31 A 33). Therefore, the party having proposed the pre-formulated general conditions of business has to bear the burden of the unfairness test. Already before the legislation dating from 1976 case law had developed this rule. Recently, the unfairness test for general conditions of business in commercial cases has been criticized by associations of the German industry and also by some voices in German legal writing. IP/A/IMCO/NT/ PE

67 II. Impact on General Contract Law (4) a) c) As already mentioned, 138 par. 1 BGB declares void a juristic act which is contra bonos mores. Further, 138 par. 2 BGB expressly regulates usury ( Wucher ), and thus also some control of the price. The general clause on good faith contained in the famous 242 BGB has been the origin of the specific rules on general conditions of business and can play a certain role in areas of the law other than contractual obligations. d) As in some other European legal orders, also in Germany suretyship or guarantee given by a family member has posed specific legal problems and produced considerable case law. Though, it may be a peculiarity of the German legal development that the Bundesverfassungsgericht (Federal Constitutional Court) had to intervene and censored a decision of the Bundesgerichtshof (Federal Court of Justice). According to the Bundesverfassungsgericht, the fundamental rights in such a case require that under certain conditions 138 BGB be applied (BVerfG , BVerfGE 89, 214). This may technically be different from vitiated consent or undue influence in English legal terms but certainly fulfils the same function and may be even more protective for the family member than the English rule. Though, the details of this appear to be beyond the scope of this paper (for details see e.g. Reinicke/Tiedtke, Bürgschaftsrecht, 3. Aufl., 56 et seq.; for a European perspective see Remien, Zwingendes Vertragsrecht und Grundfreiheiten des EG- Vertrages, 356 et seq.)). e) There clearly are specific mandatory rules, sometimes even of European origin. 276 par.3 BGB already has been mentioned in the questionnaire. Contrary to the situation described for England, with a view to the principle of freedom of contract penalty clauses under German law are not void, but may except in commercial cases be reduced by the Court if the stipulated penalty is excessively high, 343 BGB. Contractual restraints on alienation are regulated in 137 BGB and do not have absolute, but only obligationary effect. Certain other prohibitions are nowadays (since the renumbering by the modernisation of the law of obligations of ) contained in 311b par. 2 and 4: contract obliging a party to transfer his future entire patrimony or part of it or to burden it with a usufruct (par. 2), contract concerning the (successoral) estate of a third person who still is alive (par. 4). In some neighbouring cases, there is not a prohibition but a requirement of notarial form (par. 3 and 5). Besides all this, there are mandatory rules for specific contracts. On the level of European private law, the package travel directive and the consumer sales directive provide the best examples for this. The German transposition rules are to be found in the 651a et seq. BGB and 433 et seq., especially 475 BGB. However, also the law of lease, especially lease of premises for housing, contains mandatory rules in 535 et seq. BGB, especially 549 et seq. BGB. Where in case of a loan of money the borrower prematurely repays the loan, the lender s claim for compensation for premature repayment is regulated by 502 BGB and according to 511 BGB a deviation from these rules which would be detrimental to the consumer is prohibited. Worth mentioning are also the rules restricting choice of court agreements for consumer cases in 38 et seq. ZPO (Zivilprozessordnung, i.e. Code of Civil Procedure) and art. 17 Brussels I Regulation 44/2001. IP/A/IMCO/NT/ PE

68 As I take it, all these rules take precedence over the rules on control of general conditions of business. This means that where such a mandatory rule intervenes, the question of control by the rules on general conditions of business need not be asked any more. A fully harmonised general clause of European origin of course would raise the question of its interrelationship with these rules. To me it would appear to be quite an unwise attitude of the European legislator if he were to strike out all these specific rules in one general legal instrument. Any European legislation in this field should make clear that, as a rule, all these rules of Member State (or even EU) law remain unaffected by the new European instrument III. Price terms (5) Yes, the restriction is contained in 307 par. 3 sentence 1. Attentive observers of the development of EU private law will recall that article 4 par. 2 of the Directive has been inserted in to the texts after the publication of law journal articles by some German authors which called for such a rule (namely Brandner/Ulmer, EG-Richtlinie über mißbräuchliche Klauseln in Verbraucherverträgen, BB 1991, , 705; Canaris, Verfassungs- und europarechtliche Aspekte der Vertragsfreiheit in der Privatrechtsgesellschaft, in: FS Lerche , 888). In fact, the general yardstick for price fixing in a market economy appears to be the play of offer and demand in a competitive market rather than a rule of law or court decisions. It may be remarked that the rule of 307 par. 3 sentence 1 BGB there is much less clearly expressed than in the better formulated and more recent Art. 1 par. 2 and 4 par. 2 of the Directive (see also Wolf in Wolf/Lindacher/Pfeiffer, AGB-Recht, 307 no. 277). (6) As already mentioned, 138 par. 1 and 2 BGB contain rules on contracts contra bonos mores and on usury. Art. 4:109 PECL may to a certain extent be similar but has not yet been tested in practice. IV. Unfairness test (7) The general clauses of 307 par. 1 BGB and the Directive are quite vague, but 307 par. 2 BGB in its nos. 1 and 2 gives more concrete guidelines: in the case of doubt there is unfairness where a clause deviates from essential basic ideas (wesentliche Grundgedanken) of the statutory regulation (no. 1) or where essential rights and duties following from the nature of the contract are restricted in such a way that attaining the purpose of the contract is endangered (no. 2). No 1 is called the guiding function of the dispositive law (Leitbildfunktion des dispositiven Rechts) and no. 2 the doctrine of the cardinal (or: essential) duties (Lehre von den Kardinalpflichten). However, par. 2 only provides for a presumption which may be rebutted (cf. e.g. Wolf in Wolf/Lindacher/Pfeiffer 307 no. 96). Nevertheless, it can be said that German law thus gives more guidance to the courts than the present text of the Directive. (8) Under German law, unfairness of a clause is a question of law and not of fact; thus, no question of proof arises but the rule iura novit curia applies. On guidance for applying the unfairness test see question 7. IP/A/IMCO/NT/ PE

69 V. Black and grey lists (9) German law since 1976 has lists of clauses which, if contained in general conditions of business, are, or are presumed to be, unfair. When these lists were drafted account had been taken of the experience of the case law which until then had developed in the German courts. In case of commercial contracts the lists do, in principle, not apply. The black list now is contained in 309 BGB and the grey list now is contained in 308 BGB. Both lists are relatively long and detailed, the grey list of 308 has eight numbers and three of these have two sub-divisions a) and b); the black list of 309 has thirteen numbers with plenty of sub-divisions, an extreme case is the no. 8 with seven subdivisions, an a) and then b) aa) to ff). These lists are far too detailed for being explained in depth here. Detailed commentaries on the two lists as well as the general clause and their effect on the multitude of different kinds of contract to be found in practice exist in the form of at least two specialized large books (Ulmer/Brandner/Hensen, AGB-Recht, 10. Aufl. 2006; Wolf/Lindacher/Pfeiffer, AGB-Recht, 5. Aufl. 2009) and in any of the many brief or grand commentaries on the BGB. Generally, it can be said that the German lists are more detailed, focused and clear than the lists of annex II and III of the Draft Directive. Some indications must suffice here (see already Remien, Les clauses abusives dans le projet de directive sur les droits des consommateurs dans une perspective allemande, Revue internationale de droit comparé 2010 forthcoming): Some of the thirteen numbers of the black list of 309 BGB have been without counterpart in the list of the Directive and remain without such a counterpart in the lists of the Draft Directive. A full harmonisation Directive therefore would bring about a shortening of the German black list and thus a reduction of the control of unfair contract terms. Some examples must suffice here (but also see nos. 4, 6, 9, 11 and 13 of 309 BGB). 309 no. 4 says that is unfair any term according to which the pre-formulating party need not send a Mahnung (interpellatio; i.e. notice to perform) to the other party or fix an additional period of time for performance. That is to say that in the case of non-performance by the consumer, the businessperson may not in consequence of his general conditions of business profit from a more advantageous regime than the statutory one. Such a rule is missing in the Draft Directive. As far as 309 no. 8 BGB is concerned, annex III no. 1 lit. a) is relatively close but has a much more vague content and only is a grey, not a black clause. 309 no. 9 BGB concerns contracts for the periodic delivery of goods or rendering of services in its three letters a) to c) the lit. a) declares void a clause binding the other party for more than two years it has no counterpart in the Draft Directive, just the letters b) and c) have at least partially a correspondence in no. 1 lit. f) of annex III, but only with the character of a grey clause. 309 no. 13 BGB on clauses requiring for notices of termination and for declarations a form stricter than ordinary written form or specific conditions for reception again is without equivalent in the lists of the Draft Directive. One could go on and make a detailed analysis of further examples As far as the grey list is concerned, the German 308 BGB is shorter than annex III of the Draft Directive, eight instead of twelve numbers. Though, no. 1 (time limits for offer or acceptance), no. 5 (fictitious declarations), no. 7 (winding up of contracts, i.e. restitution) are without equivalent in the Draft Directive. Thus, there is again the danger of a reduction of consumer protection due to the Draft Directive. Just to take the example of clauses allowing an increase of the price: no. 1 lit. g) of annex III does consider them unfair in case the consumer does not have the right to terminate the contract but in Germany, for deliveries or rendering of services to be made within four months, 309 no. 1 BGB is stricter and declares such clauses unfair without saving them in case there is a right to terminate. IP/A/IMCO/NT/ PE

70 Apart from this rather legislative there also is a judicial aspect: A clause which until now has been on a national black list under a full harmonisation directive could not anymore be considered as being per se unfair if it is not on the European black list. If it is on a European grey list, which are the cases where it is not unfair? How and by whom should the case law of the national courts be checked? If it is not even on the European grey list, can the general clause be used? I guess yes, but probably not in a systematic manner because this would mean treating the clause as black what according to the full harmonisation Directive it is not or not any more The field of unfair terms is a topic in which full harmonisation is quite inappropriate. (10) As mentioned in the response to question 2, clauses in general conditions of business which reflect mandatory or dispositive rules of law are not subject to the unfairness test of 307 et seq. BGB or the Directive. Thus, it is not quite clear which kind of conflict possibly could arise. (11) German law has a black list and a grey list in 309 and 308 BGB and these rules have with the legislation dating from 1976 in the essence been developed from case law. This illustrates the fact that in Germany judicial control of general conditions of business under the general clause nowadays 307 BGB leads to relatively abstract, but detailed rules on unfairness of specific terms either in general or for specific kinds of contract; they go beyond the given case before the Court and to a certain extent can be generalized. The individual circumstances of the case thus do not play an important role. As the text of the present Directive is held to require taking into account the circumstances surrounding the conclusion of the contract, the German legislator has implemented this requirement, but only for businessperson/consumer contracts in 310 par. 3 no. 3 BGB and not generally. It is to be noted, however, that German law knows a further category, that of surprising clauses (überraschende Klauseln) regulated in 305c par. 1. Provisions in general conditions of business which under the circumstances, especially the exterior appearance of the contract, are so unusual that the contract partner of the user did not need to expect to be confronted with such terms, do not become part of the contract at all. Under 305c BGB, the concrete circumstances of the case may be taken account of (cf. Basedow in Münchener Kommentar zum BGB, 305c no. 5 et seq.). Abstract procedures challenging unfair contract terms brought by consumer associations or other entities currently are regulated in a specific act, the Unterlassungsklagengesetz (UKlaG), and according to 1 UKlaG these suits concern unfairness under BGB, not 305c BGB. Thus, there the concrete circumstances should not play a specific role. But, as already said, in most suits which give rise to an incident of unfair terms control, this is not different. Thus, it seems that it is probably more precise to have a specific category of something like surprising clauses where the concrete circumstances are important and to distinguish this from the more abstract unfairness test of the general clause and black and grey lists (in this sense already Remien, Rev.int.dr.comp forthcoming). Such an approach would also, so it seems, make it much easier to make use of court cases having held such or such clause to be void in suits in the same or other Member States it then would mostly be clear that these precedents did not depend on the concrete circumstances of the given case but that they should be followed in new cases and have established a legal rule of unfair contract terms control in Europe. This would further the aims of harmonisation of unfair contract term control in the Internal Market. IP/A/IMCO/NT/ PE

71 VI. General Question: (12) Not all, but complex consumer contracts certainly are in general concluded by referring to general conditions if business. Undoubtedly, also unfair terms control plays a very important role in these cases. Though it must be kept in mind that also mandatory rules of sale, package travel and lease law intervene; further, in some cases the dispositive or mandatory general or special contract law plays its role. Under the Directive 93/13, the role of the Court of Justice has quite often been discussed in German legal writing. If the aim of that Directive has been to assure Europe-wide standards for unfair terms control and exportability of general conditions of business within the Internal Market, then the Court of Justice has had to interpret the general clause of the Directive already in all these past years (in this sense already, in principle, Remien, AGB-Gesetz und Richtlinie über mißbräuchliche Verbrauchervertragsklauseln in ihrem europäischen Umfeld, ZEuP 1994, 34-66, 58 et seq.). With full harmonisation, this, in my view, does not really change, the need only may become more obvious. However, when the Court of Justice has had problems in interpreting himself the general clause of Directive 93/13 (CJEU case C-237/02 Freiburger Kommunalbauten, ECR 2004, I-3403; opinion AG Trstenjak in CJEU case C-137/08 VB Pénzügyi Lízing Zrt../. Ferenc Schneider), then these problems are in no way solved by the proposed full harmonisation Directive. For a genuine full harmonisation, the judicial aspect is decisive, but it is not even addressed by the proposal. Speaking of full harmonisation in a legal text and attaining it in Court and contract practice may thus appear as two different things but such an approach will hardly convince the European lawyer or EU citizen. IP/A/IMCO/NT/ PE

72 Poland Monika Jagielska I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) Under the Polish legal system, the unfairness test does not apply to negotiated terms. According to Article of the Polish Civil Code (further CC) (in Polish system the Unfair Terms Directive 93/13/EEC was implemented into a Civil Code) "Provisions of a contract concluded with a consumer, if they have not been negotiated individually, are not binding for consumers if they shape their rights and obligations in a way that is contrary to good customs and in flagrant violation of their interests (unfair contract terms)." Polish statutory law makes a difference between negotiated and non-negotiated terms for the unfairness test because - as mentioned above - the test applies only to nonnegotiated terms. It follows from Article CC and is clarified in Article CC: "Provisions not agreed individually are provisions of the contract over which the consumer had no influence. It concerns, in particular, the provisions of a contract taken over from the standard form of contract offered to a consumer by a contracting party." This approach is upheld in the case law, where the courts clearly state that negotiated terms are not subject to the unfairness test (including the judgments of: the Supreme Court on I CSK 173/2006; Court of Appeal in Katowice on I ACa 772/08; Court of Appeal in Warsaw on VI ACa 15/2005). (2) The answer to this question is twofold. On the one hand the unfairness test does not apply directly to contract terms reflecting mandatory statutory or regulatory provisions when they are "copied" by the party to the contract. It would be contrary to the legal system to allow the court to check the fairness of law provisions ("it is impossible to deem unfair such contract terms that refer to statutory provisions. Such conduct would suggest that general statutory law can be contrary to consumer law, which would be socially harmful and first of all contain logical errors," judgment of the Court of Appeal in Warsaw on VI ACa 844/2007). On the other hand, however, there are some statutory provisions in Polish law, such as Article 46 of the Energy Law or Article 42 of the Telecommunications Law which contain statutory authorisation for appropriate ministers to order regulations on specific matters concerning energy tariffs etc. The provisions of a contract based on such regulations are considered as standard terms and can be subject to the fairness test (judgments of the Constitutional Court on K 12/99 OTK 1999, No 6, item120; Supreme Court on IV CSK 97/2006). In this way statutory provisions may be indirectly subject to the fairness test. Article 30 (3) would not have a direct impact, but its indirect effect was discussed in Poland in the context of proposed full harmonisation whether Article 30 (3) could have an impact on standard terms based on statutory law provisions (as mentioned above). (3) Yes. The wider application of the fairness test follows primarily the wider definition of a consumer adopted in Polish law. According to Article 22 1 CC "The consumer is deemed to be any natural person who performs acts in law that are not directly con- IP/A/IMCO/NT/ PE

73 nected with the economic or professional activity" Therefore, an entrepreneur can also be treated as a consumer and the contracts concluded can be subject to the fairness test if only the entrepreneur is a natural person and the contract is not directly connected with his or her economic or professional activity. There are also some specific statutory rules extending the application of the fairness test to B2B contracts, such as Article CC on insurance contracts "Article (on unfairness control [MJ]) are applied respectively if the insured is a natural person who concludes a contract that is directly connected with his or her economic or professional activity." II. Impact on General Contract Law (4) a) The main ground would be Article 388 CC on exploitation. "If one of the parties, taking advantage of the state of necessity, inefficiency or inexperience of the other party, in exchange for its own performance will accept or reserve for itself or for a third party a performance whose value at the moment of the conclusion of the contract glaringly exceeds the value of its own performance, the other party may demand a reduction of its performance or an increase of the performance due to it, and if both are excessively difficult it may demand that the contract be declared invalid." b) Yes. According to Article 58 CC " 1. An act in law that is inconsistent with statutory law or is designed to circumvent statutory law will be invalid unless the appropriate provision envisages a different effect, in particular that those provisions of the act in law that are in valid are replaced by the appropriate provisions of statutory law. 2. An act in law that is inconsistent with the principles of community life will be invalid. 3. If only a part of an act in law is invalidated, the act will remain valid as to its remaining parts, unless it follows from the circumstances that without the invalid provisions the act would not have been performed." This provision can be used to control any contract provision either negotiated or not, in every sphere of transactions and concerning any contract clause also on the price and main subject of a contract. c) The sole reference to good faith cannot be used in the fairness test based on general rules. But in some statutory provisions (Article 58 CC mentioned above and Article CC on freedom of contracts), one may find reference to another general clause - "principles of community life" which is now being replaced by the bon mores clause. These two provisions can also serve as a basis for the fairness control. Article353 1 CC: "The parties to a contract may arrange the legal relationship as they deem proper on the condition that the contents or the purpose of that contract are not contrary to the nature of the relationship, with statutory law, and with the principles of community life." d) In the Polish legal system there are no such specific provisions on vitiated consent. IP/A/IMCO/NT/ PE

74 e) Under the general rules of Polish law of obligations, there are some mandatory rules forbidding contract terms excluding liability for intentional damages Article CC "The stipulation that the debtor is not liable for any damage that it might do to the creditor intentionally is invalid." There are also many rules forbidding provisions of specific contracts: Article 586 CC - sale on instalments " 1. The stipulation of the immediate maturity of the unpaid price in the case of missing the time limits of particular instalments is only effective if it is made in writing at the time of concluding the contract and the buyer is in arrears with the payment of at least two instalments, where the sum of the instalments in arrears exceeds one-fifth of the agreed price. 2. The seller may renounce the contract due to a failure to pay the price only if the buyer is in arrears with the payment of at least two instalments and the sum of the instalments in arrears exceeds one-fifth of the agreed price. In such a case, the seller should set the buyer an appropriate additional time limit in which to pay the amount in arrears, with the sanction that upon the ineffective lapse of the time limit set, it will be entitled to renounce the contract. 3. Contractual provisions less favourable to the buyer are invalid and are to be replaced by the provisions of this article." Article 674 CC - on construction work contract 1. In a construction works contract, as referred to in Article 647, concluded between an investor and a contractor (general contractor), the parties should specify the scope of works to be done by the contractor itself or with the assistance of subcontractors. 2. The conclusion of a construction works contract between a contractor and a subcontractor requires the consent of the investor. If the investor, within 14 days of a contractor having presented a contract with a subcontractor or its draft, along with part of the documentation regarding the performance of the works specified in the contract or its draft, does not notify, in writing, any objections or disapprobation, the conclusion of the contract will be deemed consented to by the investor. 3. The conclusion of a contract between a subcontractor and a further subcontractor requires the consent of the investor and the contractor. The provision of paragraph 2, the second sentence, applies accordingly. 4. The contracts referred to in paragraphs 2 and 3 should be drawn up in writing or will be invalid. 5. A party that concludes a contract with a subcontractor, as well as the investor and the contractor, bears joint and several liability for the payment of remuneration for the construction works performed by the subcontractor. 6. Different provisions of contracts referred to in this article are invalid Articles CC and CC on leasing contracts; Article CC on agency contracts; IP/A/IMCO/NT/ PE

75 Article 855 CC on storage contracts; Article 869 CC on partnerships; are all drafted in the same manner listing the provisions and prohibiting the lower scope of protection. Would such rules possibly conflict with the rules on unfair terms control? Yes, they may conflict if an exclusive black list is adopted and the method of interpretation would be that all other contract terms are allowed. Have there been such arguments made before? In Poland we do not have a black list, so this problem has not yet been experienced. Do you think that a fully harmonised general clause would exclude the application of such rules? Please answer this question separately for the different options explained in our briefing paper. Yes, it may cause such a danger in the case of full harmonisation, especially in light of CJEU judgments on UCPD, like VTB-VAB or Zentrale zur Bekämpfung unlauteren Wettbewerbs ev cases or on Product Liability Directive like the Bilka case. As explained below (last general question), only in a targeted harmonisation model is such a danger avoided. III. Price terms (5) Yes. According to Article CC, the unfairness test "(...) will not relate to provisions that specify basic performances of the parties, including the price and remuneration if determined explicitly." There are some doubts as to how the notion of "basic performances of the parties" should be interpreted whether it covers percentage rates or different additional payments (the judiciary takes the position that contract terms on percentage rates or additional payments can be subject to fairness control: judgment of Court of Appeal in Warsaw on VI ACa 947/2004; judgment of Supreme Court I CK 472/2003), but the general consensus is that contract terms defining the main subject matter of the contract and the adequacy of the price and remuneration are not subject to an unfairness test. (6) As mentioned above, Polish law adopts the construction of exploitation Article 388 CC "If one of the parties, taking advantage of the state of necessity, inefficiency or inexperience of the other party, in exchange for its own performance accepts or reserve for itself or for a third party a performance whose value at the moment of the conclusion of the contract glaringly exceeds the value of its own performance, the other party may demand a reduction of its performance or an increase of the performance due to it, and if both are excessively difficult it may demand that the contract be declared invalid." IP/A/IMCO/NT/ PE

76 This instrument is not confined only to price control, but rather widely to the value of a parties performance. There are also other instruments that may be used in price control such as the valorisation clause (Article CC "In the case of an essential change in the purchasing power of money after the obligation arises, the court may, after considering the interests of the parties and in accordance with the principles of community life, change the amount or the method of making a performance in money, even if these were fixed in the decision or the contract") or indirectly rebus sic stantibus clause (Article CC "If, following an extraordinary change in circumstances, the performance would be faced with excessive difficulties or threaten one of the parties with a substantial loss that the parties did not foresee when concluding the contract, the court may, after considering the interests of the parties, define the method of performing the obligations and the degree of the performance, and even decide upon termination of the contract, in accordance with the principles of community life. When terminating the contract, the court may, as far as necessary, decide upon a settlement of accounts being guided by the principles specified in the preceding sentence). IV. Unfairness test (7) Polish law provides two general criteria of fairness control that have to occur cumulatively: conflict with good customs and a flagrant violation of consumer interest (Article CC). The infringement of the consumer s interest (Article CC) occurs where there is imbalance in the parties rights and obligations arising under the contract (Article CC does not speak of imbalance ). According to the judiciary, "a flagrant violation of consumer interest" means an unjustified disproportion of consumer rights and duties in a contract and "a conflict with public decency" should be interpreted as a violation of contractual balance (judgment of Supreme Court on I CK 635/2003 and many others). The Court added that it is up to the court to assess whether the imbalance is significant. It should be noted that the literal meaning of the expression glaring used in Article CC differs from the meaning of the expression significant used in the Directive, but the Supreme Court seems to suggest that the notion glaring should be understood as significant. This interpretation was once adopted by the courts and is maintained unchanged, only elaborated ad casum. Each court, upon recognising the unfairness of a contract term, should not only invoke the above mentioned criteria, but also present the reasoning why the term meets the unfairness criteria (judgment of Supreme Court on I CK 635/2003). The courts are not obliged to point which mores were ad casum infringed, but "acting freely does not mean arbitrarily - the courts should completely justify why they regard the clause unfair referring to the rules of ethic and loyal conduct" (judgment of Supreme Court on I CK 297/05). To which degree are courts able and / or prepared to rely on non-mandatory rules of contract law in this respect? According to the judgment of the Court of Appeal in Warsaw (on VI ACa 177/2005) "while interpreting the notion of good customs the court should take into ac- IP/A/IMCO/NT/ PE

77 count legal provisions even if they are not mandatory in such a way that the contract terms which are less favourable to the consumer than such provisions may be regarded as contrary to good customs." The term of a contract should be recognised as unfair if on the basis of the existing law the consumer would be in a better position if there was no such term in a contract (judgment of Court of Appeal in Warsaw on VI ACa 939/2008). (8) As stated above, there are two criteria: conflict with good customs and a flagrant violation of consumer interest (Article CC). In general they are interpreted in a way that "a flagrant violation of consumer interest" means an unjustified disproportion of consumer rights and duties in a contract and "conflict with good customs" should be interpreted as violation of contractual balance. Consumer interests should be interpreted not only in an economic context, but also taking into account impediments and difficulties for consumers (judgment of Court of Appeal in Warsaw on VI ACa 177/2005). V. Black and grey lists (9) In Polish law there is only a grey list of terms which are presumed to be unfair. The list forms a part of a Civil Code (art CC). There are some differences from the lists given in Annexes II and III of the proposed Directive, mainly that Polish list is wider as it contains two additional clauses derived from Antimonopoly Court decisions: a clause, whereby the conclusion of the contract depends on a promise to conclude similar contracts with the other party in the future and a clause whereby the contents or performance of the contract depends on the conclusion of another contract that does not have a direct relation to the contract in question (in this sense the Polish list also differs from present list). Polish list does not contain provisions: d) from Annex II; j) and l) from Annex III. There are also some differences in expression in other clauses but the sense remains the same. (10) Article CC allows the creditor to transfer the debt to a third party without the debtor's consent, unless that would be contrary to statutory law, a contractual stipulation, or the nature of the obligation. This provision may conflict with point i. of Annex III. (11) According to Polish law, there are two different procedures of fairness control. One (called incidental or individual) is taken in individual cases by common courts, and the fairness of contract clauses is examined taking into consideration the actual case. In this case the judgment is binding only to the parties. The second (known as abstract control see Article et seq. of the Civil Procedure Code) is performed by a special court the Court of Competition and Consumer Protection, apart from the actual case and only on the basis of a sole contract. A standard contract term that is declared unfair by this Court is then inscribed to the special registry hold by the Office of Competition and Consumer Protection (see Article CPC). Such a term, as well as similar terms with the same sense (according to the Supreme Court judiciary - for example judgment on , III SZP 3/ which is questioned for example in judgment on r., III CZP 80/2008), are prohibited and can not be used by the entrepreneur who prepared it. It is doubtful whether such a clause could be used by entrepreneurs that were not parties to the legal proceedings, but the main Supreme Court s position is that such a clause is forbidden erga omnes also to other businesses outside the contract (judgment of III SK 7/06). IP/A/IMCO/NT/ PE

78 In individual control in proceedings brought by a consumer against the other party to the contract, the assessment of a contract term s fairness is based on the individual circumstances in which it was applied. In abstract control, performed by the Court of Competition and Consumer Protection, individual circumstances in which term was applied are not taken into account. The Court focuses only on the sole text of a contract. VI. General Question: (12) More and more consumer contracts are based on standard terms of contract law, the tendency is ascending, which was observed in Polish literature and judiciary even in the 80-ies of XX century. It is difficult to assess whether standard terms are decided in the context of unfair contract terms control, but there is no doubt that the fairness control performed by Court of Competition and Consumer Protection plays a vital role in B2C contracts. Businesses are starting to pay attention to the registry of unfair terms and usually avoids using forbidden clauses. It is not universal, but a significant tendency in Poland. The role of the registry is crucial mostly as a deterrent. Would you therefore expect that the future development would have to be controlled by the CJEU if the control of unfair contract terms is fully harmonised? It is very difficult to answer this question. On the one hand it must be distinctly stated that, based on the Polish experience, it would not be good if a fairness control was performed at one central level (even if it was done by the CJEU). We can face unfairness problems that would be completely unknown to other countries, and vice versa. For example, the Polish grey list differs from the list contained in the annex to Directive 93/13 as the Polish legislator made use of the minimal character of the Directive and added two additional clauses: a clause whereby the conclusion of a contract depends on a promise to conclude similar contracts with the other party in the future, and a clause whereby the contents or performance of the contract depends on the conclusion of another contract that does not have a direct relation to the contract in question. This supplementation was grounded on the Polish previous experience and judiciary of Antimonopoly Court. The same can be said about the "Argentinean" system of contract terms, which are now forbidden in Poland but created huge problem through the years. One can doubt what is a "fully harmonised control of unfair contract terms," but nevertheless it would be dangerous both to the national legal system and to consumer protection if such a control is performed at a central EU level. This includes the way of interpreting general clauses, the imposition of forbidden clauses that may be extraneous to the system and on the other hand disregarding terms that may be "dangerous" in this system. On the other hand - if such an "equalisation" is to be introduced - then the control should be entrusted to a judicial body, so the CJEU would be the most proper body to perform it, but it may be doubtful if it can manage with probable "avalanche" of cases at the moment being Polish registry contains more than 2000 clauses (which means that the Polish Court of Competition and Consumer Protection had to settle at least such amount of cases in previous ten years). Based on the experience of Polish law, judiciary and doctrine, we presume that only the model of targeted full harmonisation may allow efficient fairness control which will not ruin the coherency of the system of national private law. IP/A/IMCO/NT/ PE

79 Portugal Paulo Mota Pinto & Sandra Passinhas I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) In Portugal, the protection against unfair terms in contracts is mainly provided by Decree-Law 446/85 of October 25, as amended by Decree-Laws 220/95, of August 31; 249/99, of July 7; and 323/2001, of December 17. The Unfair Terms Regulation doesn t apply the unfairness test to terms which have been individually negotiated (Art. 1 (1) and (2)). 50 According to Art. 1(3), where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him. (2) According to Art. 3(1) of Decree-Law 446/85, contractual terms which have been approved by the legislator or which reflect provisions of international conventions to which Portugal is party, are excluded from the unfairness test. Therefore Article 30 (3) will have no effect in this regard. (3) Decree-Law 446/85 provides for a content review of standard terms, which do not merely apply to B2C contracts, but also to contracts concluded between businesses (B2B) and amongst private parties (P2P). The content review is carried out according to the general clause of Art. 15 (contradiction against good faith). Additionally, in Art. 18 et seq. and Art. 21 et seq., Decree-Law 446/85 contains four different catalogues of forbidden clauses, whereby the first two (black and grey list) apply generally, whereas the other two (also a black and a grey list), more comprehensive lists, are only applicable to consumer contracts. 51 Concerning the definition of consumer, Portugal has followed the definition of Art. 2(b) of Directive 93/13/CEE: any natural person who is acting for purposes which are outside his trade, business or profession. In Portugal, it is not clear whether legal persons can be protected as consumers. A draft of a new Consumer Code acknowledges that legal persons may, in certain circumstances, benefit from the protection conferred to consumers. The same would apply to natural persons acting for purposes of their trade, business or profession. II. Impact on General Contract Law (4) The Portuguese Civil Code of 1966, (hereinafter CC), had already developed some specific rules generally prohibiting or invalidating unfair contracts. Under those rules, terms may be invalid even if individually negotiated. It the case rules on terms that may directly or indirectly produce an imbalance in the parties rights and obligations resulting from the exploitation of one party s weakness, necessity, dependence, or mental state (Art. 282 of CC); rules on illegality and boni mo- 50 Directive 93/13/CEE was implemented by means of Decree-Law 220/95 of August 31, applying only to general contractual clauses (standard terms). Only through a further amendment in 1999 (Decree-Law 249/1999 of July 7) did pre-formulated individual contracts come within the scope of Decree-Law 446/ See Pinto Monteiro, The Impact of the Directive on Unfair Terms in Consumer Contracts on Portuguese Law, 3 (1995) ERPL , at 238. IP/A/IMCO/NT/ PE

80 res (Art. 281 CC); rules on vitiated consent (Arts. 232, 253, and 259 CC); and also mandatory rules specifically forbidding certain contract terms (for instance, disproportionate liquidated damages and penalty clauses Art. 812). Provisions such as Arts. 809 and 808(2) CC provide whether liability for loss or damage resulting from a breach of duty can be excluded in advance. Would such rules possibly conflict with the rules on unfair terms control? Have there been such arguments made before? Do you think that a fully harmonised general clause would exclude the application of such rules? Please answer this question separately for the different options explained in our briefing paper. (I) Complete (substantial) full harmonisation In a context of complete full harmonisation, with e.g. conclusive black and grey lists and full harmonisation of the unfairness test, the application of general contract law would be excluded from the control on unfair terms in standard and/or non-negotiated individual terms. The Proposal, as it currently stands, could probably down level consumers protection. (II) Limited full harmonisation In our opinion, the above would apply to a great extent in a limited full harmonisation scenario. So, for instance, it would be debatable whether a full harmonisation of price control and other measures would still allow application of Art. 282 CC. See answer (6). (III) Targeted full harmonisation This scenario is much in line with the regulation already existent. It should be pointed out, however, that Art. 6(1) of Directive 93/13/CEE envisages that unfair clauses are not binding, so the remainder of the contract is usually preserved. In Portugal, a contractual term considered unfair will be automatically deemed null and void. The consumer may then choose to keep the contract itself in force, in accordance with the principle of conservation (Arts. 9 and 13 of Decree-Law 446/85). Damages or compensation are available only under general civil law/contract law (via breach of a contractual duty, tort or related concepts, like pre-contractual liability). III. Price terms (5) Decree Law 446/85 did not transpose the restriction of Article 4(2) of Unfair Terms Directive. So, according to Art. 2, the unfairness test applies to all terms of the contract. (6) Yes. Article 282 CC provides that a contract is to be considered voidable if one party uses undue influence (based on need or vulnerability of the other party) and derives excessive unjustified benefits from the contract. Both requirements are cumulative Carlos Mota Pinto, Teoria Geral do Direito Civil, 4.ª ed. (by António Pinto Monteiro and Paulo Mota Pinto), Coimbra Editora, pp IP/A/IMCO/NT/ PE

81 The Supreme Court has recently decided that a loan contract where parties agreed upon interest of 10%, along with the sale of a house to the lender with a guarantee function, is usurious. 53 It should also be taken into consideration that Portuguese case law considers the balance in the parties rights and obligations when assessing the fairness of a contract. See question (8). IV. Unfairness test (7) Art.15 of Decree Law 446/85 contains a general standard for controlling the fairness of contract terms based upon the good faith principle. As a result it is possible that, in any given case, a term which is not found in the lists of either absolutely or relatively forbidden clauses can still be declared void by a court on the basis of that principle. 54 Legal literature also recommends that courts consider the default legal provisions. (8) The expression significant imbalance can be found in Portuguese legislation. Article 9(2) of Decree Law 446/85 establishes that a contract cannot be kept in force if, without the unfair terms already declared null, it still causes a significant imbalance in the parties rights and obligations, contrary to the requirement of good faith. Case law, however, makes a direct connection between the control based on good faith and an adequate balance between parties rights and obligations. 55 V. Black and grey lists (9) Portuguese Law, in addition to the general clause applying to all transactions (Art. 15 of Decree-Law 446/85), also has extensive grey and black lists. In relation to business contracts, terms referred to in Articles 18 and 19 are forbidden. Consumer contracts enjoy a higher standard of protection, because in addition to terms referred to in Articles 18 and 19, provisions described in Articles 21 and 22 are also prohibited. The black lists include terms: excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier; inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial nonperformance or inadequate performance, by the seller or supplier, of any of the contractual obligations; including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him; making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realization depends on his own will alone; permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract; authorizing the seller or supplier to dissolve the contract on a 53 Decision of the Supreme Court of , in www. dgsi.pt. 54 See Pinto Monteiro, The Impact of the Directive on Unfair Terms in Consumer Contracts on Portuguese Law, 3 (1995) ERPL , at See v.g. the decision of the Court of Appeal of Lisbon, of , and the recent decision of the Supreme Court, of , both in IP/A/IMCO/NT/ PE

82 discretionary basis; enabling the seller or supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided; giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, or giving him the exclusive right to interpret any term of the contract; obliging the consumer to fulfill all his obligations where the seller or supplier does not perform his; giving the seller or supplier the possibility of assigning his rights or obligations under the contract, where this may serve to reduce the guarantees for the consumer, without the latter's agreement; unduly limiting the remedies, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract. As terms listed in the grey list, we find terms: requiring any consumer who fails to fulfill his obligation to pay a disproportionately high sum in compensation; enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so; automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express this desire not to extend the contract is unreasonably short; enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract; providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded; limiting the seller s or supplier s obligation to respect commitments undertaken by his agents or making his commitments subject to compliance with a particular formality. Portuguese lists differ from the Proposed Directive, firstly, because some terms included in the black lists are not found in the proposed Directive, such as terms inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance, by the seller or supplier, of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him; or terms obliging the consumer to fulfill all his obligations where the seller or supplier does not perform his. Secondly, some terms including in Portuguese black lists are to be found in the grey lists of the Proposed Directive. For example, terms excluding or limiting the legal rights of the consumer vis-à-vis the trader or another party in the event of total or partial non-performance or inadequate performance by the seller of any of the contractual obligations, including the rights of the consumer of offsetting a debt owed to the trader against a claim which the consumer may have against him (these contract terms belong to the black list set in Art. 18(f) (g) and (h)); terms giving the seller the possibility of transferring his obligations under the contract, without the consumer's agreement (Art. 18(l)); terms enabling the seller to unilaterally alter the terms of the contract including the characteristics of the product or service (Art. 21 (c)); and finally, terms unilaterally amending contract terms communicated to the consumer in a durable medium through on-line con- IP/A/IMCO/NT/ PE

83 tract terms which have not been agreed by the consumer (terms against Art. 8 of Decree-Law 446/85). (10) No. (11) In Portugal, the Standard Terms Register contains a list of clauses which are declared as unfair. The Standard Terms Register aims at increasing the protection of consumers by publicizing standard terms and judgments on unfair terms. A list of case law on unfair terms can be accessed online in ( Cláusulas contratuais gerais julgadas pelos tribunais portugueses ) VI. General Question: (12) The answer is positive for both questions. IP/A/IMCO/NT/ PE

84 Romania Mónika Józon I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) The domestic implementing law, Law no. 192/2000, of Directive 93/137EEC only refers to non-negotiated terms. There is no case law or doctrinal debate to be reported on the use of the unfairness test for negotiated terms. However, the situation may change in the future as concerns general contract law, after the entering into force of the New Civil Code enacted in July 2009, which introduces common provisions on the use of standard terms and unusual clauses, although consumer contracts do not fall under the Civil Code (Art ). These common provisions will apply to all contracts, regardless of the status of the parties, including Business2Business and Private2Private contracts. As concerns consumer contracts, the common provisions will apply in addition and in completion to the special laws on consumer protection. Under the heading of unusual terms (Art ) is stipulated in the New Code that are forbidden those standard clauses, which provide in the benefits of the proposing party: limitation of liability, the rights to terminate the contract unilaterally, to suspend the execution of obligation; or which stipulate into the detriment of the other party that the loss of rights or the benefits of the contract term in case the contracts subject to temporal conditions; limitation of the right to raise objections, limitation of the right to contract with other persons; the right to tacit renewal of the contract; limitations on the applicable law; automatic cancellation of the contract, contract cancellation without previous notification of the other party to execute a due obligation; derogations from the competence of the courts. Such clauses will only have legal effect, when are accepted explicitly in written by the other party. Although, the New Civil Code does not use the word unfair, the concept of the provision is similar to that European approach on unfair contract terms. Art does not use the terms negotiated or non-negotiated and the focus of the provision is on the form of agreement of the contracting parties and not on the negotiation of the clause, i.e. the possibility of the other contracting party to influence the content of the clause. Therefore, the provision can be also interpreted in the meaning that, the drafters of the Civil Code meant to apply it for both negotiated and non- negotiated terms. So far there is no doctrinal reaction on this unclear wording of Art Art of the New Civil Code also defines the adhesion contract (contract de adeziune) as being a contract in which the essential clauses are imposed or drafted by one of the parties, for him, or upon his instructions, the other party having the only option to accept them. The term of standard clause is defined by the common provisions on contracts under the heading on formation of contracts in Art. 1.20(2), which states that standard clauses are those, which are established in advance by one of the parties to be applied in general, and repeatedly, and which are not included in the contract upon negotiations (are not subject to negotiations). IP/A/IMCO/NT/ PE

85 (2) Art. 3 (2) of Law no. 193/2000 excludes from control those clauses, which are included in contracts, that are drafted on the basis of valid legal acts. This is an extremely broad approach, since the concept covers all level laws and regulations, not only mandatory rules. The New Civil Code also uses a broad concept of limitation of contractual freedom in Art , which does not limit regulatory intervention to mandatory rules, but uses the concept of law, in general. The old Civil Code was more liberal on contractual freedom that could be restricted only by imperative rules on ordre public and good moral. According to Art. 968 Old Civil Code the cause of a contract is illegal when is forbidden by law, when infringes good moral and ordre public. This provision was later expanded to imperative norms in general, not limited to ordre public and good moral. Law no. 193/2000 uses the term of merchant and consumer and does not make mention of public contracts. Thus, according to the definition of merchant under the Romanian commercial law, this concept would only cover private contracts. However, under Law no. 193/2000, courts have assessed the fairness of public contracts as well. This interpretation is allowed by the general wording of Art. 1 (3), which states that: the law applies to any contract regardless its nature and object. At this point is important to emphasize that the Romanian law did not take over the provisions of Art. 4(2) of Directive 93/92. The Romanian provision gives to the court room to assess under Law no. 93/2000 even public contracts. Thus unlike the Directive, even clauses on the payment or supply modalities, which quantify the rights and obligations of the parties, may be assessed by the courts under the unfairness test. In a recent case the High Court of Cassation and Justice established that a regional railways company owned by the state should stop to apply platform access fees, under a standard ticket agreement, because this is unfair (Decision no.3753/2008). The platform access fee was qualified by the Court as an adhesion contract, which is abusive because the railways company does not offer a service against the access fee, but uses the platform access ticket in order to prevent and limit the access to the platforms of persons, who do not possess a travel ticket. Therefore, argued the Court, it is obvious the disequilibrium between the rights and obligations of the parties to the contract, which was not negotiated individually. In this case the abusive clause was imposed by an administrative act, a public law act of the general director of the Romanian Railways Company. In another case, concerning a water supply agreement (public law contract) a lower court established the unfairness of a clause stating that the consumer should pay for the leakages from the public pipeline. In this case the court considered that such a clause is abusive per se and did not analyze the issue of contractual equilibrium or good faith. The reasoning of the court focuses on the fact that this clause was not negotiated with the consumer, since is part of a contract of adhesion. The court also emphasizes that such a contractual clause was not derived from a law or normative act, such as the annex of the Government Decision no. 1591/2002, which contains a framework contract on water supply and governs the access to the public pipeline and the provision of service (Decision no.278/2009, Judecătoria Petroșani). The New Civil Code has a special provision on supply contracts, which apply to goods and services provided with regularity or continuity (Art. 1766). Although, the provision does not specify whether it applies to public contracts or not, an affirmative answer on this IP/A/IMCO/NT/ PE

86 question results from the wording of Art. 1768, which guarantees contractual stability in case of supply price changes. When the price of such goods and service will change during contract execution due to price regulations or modifications in the price setting mechanism, then the parties will continue to apply the price or price setting mechanism established in the initial contract. In case such laws explicitly provide that the price or the modality of price setting will change also for contracts concluded under the old rules, then either party may declare the contract terminated within 30 days from the date of entering into force of the new law. For 30 days the old price will apply. (3) Law no. 193/2000 applies above all to individual consumers and to collective entities such as associations. Because Art. 2 of Law no. 193/2000 does not refer to legal persons, the definition of consumer was subject of a constitutional court decision under Art.21 (1)(2)(3) on access to free justice and equitable justice, Art 24 (1) on the right to defense, Art. 44 (1)(2) on property right, Art. 53(2) on the restriction of certain rights and liberties of the Constitution of Romania and Art. 6 (1) of the ECHR. The Constitutional Court although acknowledged that it may be the case of a legislative omission, considered that has not the competence to rectify this deficiency of the law (Decision no of 16 October, 2008). Under the New Civil Code the tendency is clearly in the direction of extension of the unfairness test to Private2Private transactions, as well as to Business2Business transactions. However, such a broad definition was not yet elaborated by courts or doctrine. In view of the few decisions it seems that the application of unfairness test is not driven by the concept of consumer, but by the non negotiated nature of the clause. II. Impact on General Contract Law (4) One can say that contract law jurisprudence and doctrine mainly remained unreceptive and unaffected by the influence of consumer contract law/ec consumer law on general contract law. There is an attempt in the legal doctrine towards a conceptual transposition of the policy and rules beyond the unfair contract terms into general contract law, especially as concerns the tools for assessing unfairness 56. Upon the example of the French legal doctrine the European rules on unfair consumer terms are to some extent translated into the concepts of general contract law. This is however, an isolated case in the doctrine versus the missing doctrinal debate. Such a tendency is not to be found in case law. In the very few cases the Romanian courts only refer to the implementing law of Directive 93/92. The test imported from the French doctrine 57 consists of: reciprocity, commutativeness of contractual obligations, equivalency and proportionality. This test is built around the institution of vitiated intent or causation. 56 E. Mihai, P.R. 10/2007, Clauze abuzive sau vatul consumentalist al echilibrului contractual, 39 ff. 57 Mainly the approach of: L. Fin-Langer, L equilibre contractuel, LGDJ, 2002, p ; S. Pech-Le-Gac, La proportionnalite en droit prive des contrats, LGDL, 2000, no. 5; Ph. Stoffel-Munck, L abus dans la contrat, essai d une theorie, LGDJ, 2000, p. 308, no. 364 ; L. Grynbaum, Le contrat contingent: l adaption du contrat par le juge sur habilitation du legislateur, LGDJ, 2004, no. 43. IP/A/IMCO/NT/ PE

87 The applicability of this type of transposition of the unfairness concept of the consumer law into the concepts of general contract law is not suitable since in case of unfair consumer terms we are no longer in presence of equal bargaining power and equally informed parties, which could justify the use of concepts and principles developed under the theory of contract autonomy. The starting assumption in consumer law is the less informed, weak consumer, who needs protection vis a vis the business. This approach is even less acceptable in the context that consumer law is left outside the New Civil Code (Art ). a) Under the New Civil Code courts may reduce the amount of enforcement penalties if these are unreasonable even if such clause was previously negotiated by the parties. b) There is settled case law, that are void those contracts and clauses, which infringe the law or good moral. Art. 968 of the Old Code Civil states, that the cause of a contract must be legal and moral, according to the ordre public. Under the objective theory of the cause of contract it is argued that the abusive clause affects the contract s cause 58. The same author argues that the use of cause as instrument of identification of an unfair clause results from the wording of art. 4 of Law 193/2000, which states that a term is unfair if causes disequilibrium of the rights of the parties and infringes good faith. c) Under Romanian law good faith is general requirement during contract execution (Art. 970 old Civil Code). Case law and legal doctrine defines the concept as being the obligation to execute the contract diligently, according to bonos mores and bones pater familias, Art. 1080(1). This provision is interpreted broadly covering also the precontractual phase. The New Civil Code introduces a general concept of good faith in contract negotiation, similar to the UNIDROIT Principles on Commercial Contracts. The general requirement of good faith is to be found under the general provisions on contracts in Art , which stipulates that the contracting parties must act in good faith during contract negotiation, conclusion and execution. This obligation cannot be limit or excluded by the parties. Art reinforces this obligation in relation to contract conclusion. The requirement of good faith is to be found also in the rules on contract interpretation. Art. 14 states that natural and legal persons must exercise their rights and obligations in good faith according to the ordre public and the good moral. Good faith is presumed until the contrary. d) There is no case law in Romania where unfair terms were challenged under the rules on vitiated consent. However, since Law no. 193/2000 did not implement the restriction of Art.4 (2) of Directive 93/92 under the Romanian law the only modality to terminate such a contract is the vitiated intent (leziunea). Leziunea is defined as the obvious vitiated consent consisting in a disproportion between the values of the obligations of the parties to a contract E. Mihai, op. cit., p Gh. Beleiu, Drept Civil Român, Introducere în dreptul civil, 1995, p IP/A/IMCO/NT/ PE

88 In fact Law no. 193/2000 introduced the concept of contractual equilibrium and vitiated consent as legal reason for termination of a contract. In this context should be also mentioned that the provisions of the old Civil Code on vitiated consent excludes the error on the subject matter of the contract. Therefore, Law no. 193/2000 is a novelty in comparison to the general contract law. According to Art New Civil Code, the vitiated consent can only be invoked in good faith. e) Under the Old Civil Code penalty clauses were not justiciable by courts (Art. 1087). The situation will change under the New Civil Code, which in Article states that courts may reduce the amount of such penalties in case of: partial performance accepted by the creditor, ii) the penalty is excessively higher than the damage which could be foreseen at the moment of contract conclusion. However, in the latter case the reduced penalty must stay higher than the non-performed obligation. Contract clauses contrary to Art are void by law. Under the general contract law there are no effective instruments in place developed by positive law or case law for the control of unfair terms. There is no significant doctrinal debate on this matter. A fully harmonized general clause would not affect the current state of general contract law on unfair terms, since this body of law is underdeveloped and mostly missing in Romania. The aims of the prohibitions under the Proposed Directive are different from the general principles of the common provisions on contract law. Therefore the two should not be treated as substitutes. However, the situation may be different under the New Civil Code (Art ). III. Price terms (5) No, at this point Law no. 193/2000 derogates from the Directive. (6) No, the main rule remains: pacta sund servanda. The New Civil Code only deals with unforeseeable circumstances. IV. Unfairness test (7) Courts base the decision on the text of Law no. 193/2000. No supreme court s case can be reported in which an abusive clause had been challenged on the basis of the common provisions on contracts of the Civil Code. Art. 3 (1) of Law 193/2000 sets the test: is abusive the clause, which was not negotiated directly with the consumer and which because of the infringement of good faith causes a significant disequilibrium of the rights and obligations of the contracting parties. Except the isolated doctrinal attempt to translate the unfairness test of Law no. 193/2000 into general contract law upon the model of French law, there is no example to be reported on the legal basis applied by the courts, other than the text of Law 193/2000. In the few decisions adopted so far, the courts do not detail burden of proof aspects for the establishment of the contractual disequilibrium or good faith, but simply quote the clause, which is identical or similar to a clause on the black list of Law 193/2000. No court case and doctrinal debate can be reported on the needs or legitimacy of extension of such list to other cases by using the tests of contractual disequilibrium IP/A/IMCO/NT/ PE

89 and good faith. In general, case law is so underdeveloped on unfair contract terms that one cannot talk yet of trends or tendencies in the approach of the courts in handling typical cases of abusive contract term. To which degree are courts able and / or prepared to rely on non-mandatory rules of contract law in this respect? There is no case to be reported in which courts used non mandatory rules of contract law for establishing unfairness of contractual clauses. Romanian courts would be in general reluctant to rely on non-mandatory rules of contract law, because consumer protection is rather perceived as mandatory law, under a strong paternalistic approach at legislative level, even if this paternalism is weak at level of enforcement. (8) According to Law no. 193/2000 the clauses from the black list are not considered per se contrary to law, but must be assessed case by case whether the requirement of good faith has been infringed and whether this caused a significant disequilibrium in the rights and obligations of the contracting partiers. In light of this provision can be said that only an imbalance caused in bad faith is sanctioned under the Romanian law. However, in the very few cases the courts rather invoke the list and do not analyze in details the contractual imbalance. Thus in a consumer credit case, the court of first instance of Buzău established that the defendant bank infringed Art. 4(1) of the Law 93/2000 (which is in compliance with Directive 87/102 on consumer credit) with a clause which stipulated that interest rates may be unilaterally changed by the bank in case changes on the financial market justify such a measure and that the consumer will be notified about the level of the chargeable interest rate in registered mail. The bank increased the interest rate two times in a short period of time and did not give notice about the second increase. The Court stated that is the case of a not negotiated term. According to Art. 4 of Law no. 193/2000 is for the merchant to prove that the contractual clause under assessment was negotiated individually with the consumer. It established that such a clause infringes Art. 3 and 4 of Directive 87/102, because the bank did not provide the elements, which allow for unilateral modification by the bank of the interest rate. Court further established that the bank by not specifying the criteria used the clause only in own interest, the consumer not having the possibility to verify if the increase is justified and necessary (test of proportionality). Considering that the interest rate is an essential element of a consumer credit contract, the court disposed its cancellation for the future and the restoration of the situation in which the parties have been before contract conclusion. (Judgment of ). V. Black and grey lists (9) The black list of Law no. 193/2000 is not exhaustive, only gives examples of unfair terms. However, the use of such terms in a contract is not sufficient for qualifying the clause as unfair. Such a clause must cause a significant disequilibrium in the rights and obligations of the parties in bad faith from the party proposing it. IP/A/IMCO/NT/ PE

90 The list of the New Civil Code in Art is drafted along a different concept. These provisions are mandatory and the courts do not have the freedom to add new categories of clauses. However, the New Civil Code does not contain a test to be employed by the courts, which means that such terms are presumed to be forbidden. This means that the burden of proof is on the party using the clause. Lit. c), e), j), f) of Annex III of the Proposed Directive are not covered under Law no. 193/200, but the lit. c) clauses can be challenged under the common provisions on contractual penalties. The New Civil Code states in Article that penalties may be reduced by courts if these far exceed the damage caused. Concerning lit. e) is important to emphasize that the concept of serious breach of contract does not exist under Romanian law, although general contract law is designed in the New Code Civil upon the model of the CISG. Lit. (j) does not have a corresponding provision under Romanian consumer law or civil law. However, such a clause may fall under the provisions of the competition law, which is based on the same principles as EC competition law. However, its relevance will be minor in practice, since consumers usually do not resale goods. Under the general rule of Art.1 of Law 193/2000 the unfairness test applies to all contracts, regardless of the form of contract and its support. The only requirement is that the contract must be in written. The provisions on electronic commerce have similar rules such as of lit. l). Therefore is not relevant that such a provision is not included on the Romanian black list. Concerning financial services an Emergency Government Ordinance no. 50/2010 issued on June 11, 2010 transposed the provisions of Directive 2008/48/CE into the Romanian law. (10) Not the case under Romanian law. (11) The number of cases is too few to draw conclusions on court practice and judicial culture on unfair contract terms. However, the courts have extended the application of Law no. 193/2000 to public contracts as well. However, one cannot speak of a judicial black or grey list, because even when a standard contract clause was declared unfair in a specific case, the courts will not declare unfair identical clauses in similar contracts. No case can be reported, where administrative authorities in the field of local public utilities or banking supervision authorities would have acted to forbid certain standard clauses in the specific sector, as a consequence of a court decisions on the unfairness of a standard clause, which is largely used in the specific sector. IP/A/IMCO/NT/ PE

91 VI. General Question: (12) The few lowest court cases do not provide sufficient information for conclusive findings on this matter. However, all these cases are about standard terms. Art. 3 (1) of Law no. 193/2000 is simple in wording when defines the material field of application of the unfairness test. The law applies to any contract, regardless of its nature and object, concluded between a professional and a consumer. It applies to all contracts concluded in written, regardless of the support used for that purpose. Although, Art. 4 (1) is about adhesion contracts, the law applies to any contracts, even to future contracts, which will be concluded on the basis of general conditions of purchase. The proposed Directive is a shift in the European policy on contract unfairness from substantive protection towards a rather procedural approach. Therefore its effectiveness will mostly depend on the judicial culture at Member State level, more specifically on the tools employed by the courts in establishing unfairness. Because of this, the solution is to develop such substantive rules on the test of unfairness in the future Directive, which can be efficiently used by the domestic courts. In lack of a clear test on unfairness courts and doctrine like in France and recently in Romania will try to employ the concepts and tools of general contract law, which are developed under the principles of party equality and party autonomy. The principles of general contract law are not suitable substitutes for the missing tool, and the opposite is also true. Neither the current nor the proposed EU consumer contract law are suitable to be expanded into general contract law. The two, consumer law and general contract law, serve different purposes in terms of social justice and it is recommendable that the two fields are treated under different regulatory approaches. Partial harmonisation with focus on the unfairness test would be the ideal solution, under a more consumer focused and less market law approach. IP/A/IMCO/NT/ PE

92 United Kingdom Geraint Howells I. Scope of Chapter V of the Proposal for a Directive on Consumer Rights (1) The Unfair Terms in Consumer Contracts Regulations 1999 (1999Regulations) only apply the unfairness test to negotiated terms (Reg. 5). The Unfair Terms Act 1977 (1977 Act) does not generally draw such a distinction, but the section controlling liability arising in contract only applies when one of the parties deals as a consumer or on the other s written standard terms of business (s.3). (2) The 1999 Regulations do not apply to terms reflecting mandatory statutory or regulatory provisions (Reg. 4(1)). Therefore art. 30(3) will have no effect. (3) No. Consumer is defined in the same manner in the Regulations (Reg. 4(1)) as under the Directive. There are of course the rules of the 1977 Act. The Law Commission has recommended that the 1977 Act and 1999 Regulations be combined into one regime and the Government has signalled its support for such a move. II. Impact on General Contract Law (4) The most important controls are those contained in the 1977 Act. The Act prohibits certain terms: exclusion of liability for death and personal injury caused by negligence; exclusion of sellers statutory implied undertakings as to title and in the consumer context implied undertakings as to conformity of the goods with description or sample, quality or fitness for purpose; and for goods ordinarily supplied for private use or consumption exclusions in guarantees of loss or damage arising from the goods proving defective or resulting from the negligence of a person involved in manufacture or distribution and guarantees, not provided under contracts in which ownership and possession are transferred, cannot exclude or restrict liability for loss or damage resulting from a breach of duty of a person concerned in the manufacture or distribution. These might be equated to a black list. Other terms are subject to a reasonableness test: exclusions of other liability for negligence; exclusions of contractual liability where the other party is a consumer or uses the other s written standard form or claims to be entitled to make no performance or perform in a manner substantially different from that reasonably expected; unreasonable indemnity clauses in consumer contracts. Prior to the enactment of the 1977 Act the English courts had exercised control over unfair terms by invoking rules on incorporation and interpretation (e.g. contra proferentum rule and rules regarding fundamental breach). Once statutory control were in place such rules are likely to be used less frequently but remain available; equally justice can sometimes be achieved by the assistance of the law of misrepresentation. IP/A/IMCO/NT/ PE

93 Mention is made above of the English law on penalty clauses. The English law distinguished between a permitted liquidated damages clause, which is a genuine attempt to assess the loss likely to be occasioned by breach and which it can be efficient to provide for in the contract, and a penalty clause that seeks to punish. Dunlop Pneumatic Tyre Company Ltd. New Garage & Motor Co Ltd. [1915] AC 79 provided some rules of construction for distinguishing between the two. A contract which is prejudicial to justice by ousting a parties access to the courts would be treated as an illegal contract; but arbitration clauses are permitted and access to the courts in arbitration has been reduced by the Arbitration Act Consumers cannot be bound in advance to arbitrate disputes less that 5,000 (ss89-91 Arbitration Act 1996). The law of undue influence may also be invoked where one party has both a position of influence over the other and has abused that position. Both elements need to be present. The law distinguishes between actual undue influence and certain relationships (but importantly not that of husband and wife) where there is a presumption. However, the value of this presumption has been weakened by the House of Lords decision in Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44, [2002] 2 AC 773 where it was made clear that it was only a presumption and it was important to benefit from considering the facts and it drew a possible distinction between a presumption of influence and a presumption that it had been abused. Cases of actual undue influence may overlap with duress. There are three types of duress: duress to the person, duress to goods and, probably the most relevant, economic duress. Originally based on the concept of coercion of will in recent times attention has switched to whether the pressure exerted was illegitimate or not. However, this can be difficult to determine, particularly problematic is the situation where one party threatens to breach their contract. There is an equitable doctrine of unconscionabilty and older cases set contract aside based on some infirmity of the individual. However, this is rarely evoked in modern cases. By comparison the doctrine is vibrant in Australia (see Commercial Bank of Australia Ltd v Amadio, (1983) 151 CLR 447 where it seems to perform a similar function to the English doctrine of undue influence). In the consumer credit field the unfair credit relationship provisions of the Consumer Credit Act 1974 (s. 140A et seq). These replace earlier provisions on extortionate credit bargains. Obviously if the harmonisation extends beyond consumer contracts and covers negotiated contracts it will impact on the 1977 Act (and proposed Law Commission reforms) if there is full harmonisation. Equally if it covers more general law principles it would affect the common law doctrines set out above. If you ask for my personal opinion I would not favour any form of maximal harmonisation and would limit any to the minimum possible. I think the Director General of Fair Trading v First National Bank [2001] UKHL 52, [2002] 1 AC 481 and Freiburger Kommunalbauten v Hofstetter, C 237/02 [2004] ECR I-3403 case shows that assessment of unfairness can not be divorced from local context. IP/A/IMCO/NT/ PE

94 III. Price terms (5) This exclusion is to be found in Reg.5(2) of 1999 Regulations. It has been litigated up to the Supreme Court in the context of the bank changes case: Office of Fair Trading (OFT) v Abbey National plc & Ors [2009] UKSC 6. This found that bank charges were not subject to review. This has led the UK government to issue a call for evidence Consumer Rights Directive: Allowing Contingent or Ancillary Charges to be Assessed for Unfairness (BIS, 2010) (6) No. Some control may be exerted by the consumer credit provisions mentioned above, but the scope for challenges based on price alone is probably limited. IV. Unfairness test (7) If I have understood this question correctly: the legal rules are found in 1999 Regulation. (8) Again, if I have understood correctly, I think it may be getting at the relationship between procedural and substantive fairness. In this respect the decision in Director General of Fair Trading v First National Bank [2001] UKHL 52, [2002] 1 AC 481 is important. Key excerpts include: Lord Bingham: 17. The test laid down by regulation 4(1), deriving as it does from article 3(1) of the directive, has understandably attracted much discussion in academic and professional circles and helpful submissions were made to the House on it. It is plain from the recitals to the directive that one of its objectives was partially to harmonise the law in this important field among all member states of the European Union. The member states have no common concept of fairness or good faith, and the directive does not purport to state the law of any single member state. It lays down a test to be applied, whatever their pre-existing law, by all member states. If the meaning of the test were doubtful, or vulnerable to the possibility of differing interpretations in differing member states, it might be desirable or necessary to seek a ruling from the European Court of Justice on its interpretation. But the language used in expressing the test, so far as applicable in this case, is in my opinion clear and not reasonably capable of differing interpretations. A term falling within the scope of the regulations is unfair if it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties' rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. The illustrative terms set out in Schedule 3 to the regulations provide very good examples of terms which may be regarded as unfair; whether a given term is or is not to be so regarded depends on whether it causes a significant imbalance in the parties' rights and obligations under the IP/A/IMCO/NT/ PE

95 contract. This involves looking at the contract as a whole. But the imbalance must be to the detriment of the consumer; a significant imbalance to the detriment of the supplier, assumed to be the stronger party, is not a mischief which the regulations seek to address. The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 of the regulations. Good faith in this context is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers. It looks to good standards of commercial morality and practice. Regulation 4(1) lays down a composite test, covering both the making and the substance of the contract, and must be applied bearing clearly in mind the objective which the regulations are designed to promote. Lord Steyn: 36. It is now necessary to refer to the provisions which prescribe how it should be determined whether a term is unfair. Implementing article 3(1) of the directive regulation 4(1) provides: "'unfair term' means any term which contrary to the requirement of good faith causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer." There are three independent requirements. But the element of detriment to the consumer may not add much. But it serves to make clear that the directive is aimed at significant imbalance against the consumer, rather than the seller or supplier. The twin requirements of good faith and significant imbalance will in practice be determinative. Schedule 2 to the Regulations, which explains the concept of good faith, provides that regard must be had, amongst other things, to the extent to which the seller or supplier has dealt fairly and equitably with the consumer. It is an objective criterion. Good faith imports, as Lord Bingham has observed in his opinion, the notion of open and fair dealing: see also Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433. And helpfully the commentary to the 2000 edition of Principles of European Contract Law, prepared by the Commission of European Contract Law, explains that the purpose of the provision of good faith and fair dealing is "to enforce community standards of fairness and reasonableness in commercial transactions": at 113; A fortiori that is true of consumer transactions. Schedule 3 to the Regulations (which corresponds to the Annex to the directive) is best regarded as a check list of terms which must be regarded as potentially vulnerable. The examples given in Schedule 3 convincingly demonstrate that the argument of the bank that good faith is predominantly concerned with procedural defects in negotiating procedures cannot be sustained. Any purely procedural or even predominantly procedural interpretation of the requirement of good faith must be rejected. IP/A/IMCO/NT/ PE

96 37. That brings me to the element of significant imbalance. It has been pointed out by Hugh Collins that the test "of a significant imbalance of the obligations obviously directs attention to the substantive unfairness of the contract": "Good Faith in European Contract Law," (1994), 14 Oxford Journal of Legal Studies 229, 249. It is however, also right to say that there is a large area of overlap between the concepts of good faith and significant imbalance. V. Black and grey lists (9) The terms set out in the 1977 Act as always being excluded may be described as black lists. The provisions on title and guarantees may be more extensive that in the list proposed by the Directive. (10) There are guidelines produced by OFT and FSA rules which the government is keen to maintain. (11) Office of Fair Trading v Foxtons Ltd., [2009] EWCA Civ 288; [2010] 1 W.L.R. 663 is an interesting case where at first instance the judge refused to extend a collective injunction to cover existing contracts. They Court of Appeal overturned thus but there is still some uncertainty about the ability of the term to be justified in future litigation. This may turn on the wording of the injunction or declaration. This highlights the unclear relationship between collective and individual control. VI. General Question: (12) Challenges to terms are usually based on analysis of standard form contacts and the Office of Fair Trading has been very active in this regard. Particularly in the credit context however unfair relationship and undue influence are significant factors. The 1977 Act also has a different scope to the 1999 Regulations. IP/A/IMCO/NT/ PE

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