Turn the Unfair Terms Directive into a Regulation!

The Unfair Terms Directive (UTD) is one of the oldest pieces of EU legislation in the area of private law. After more than 30 years of application, its few and short provisions have been supplemented by a voluminous body of case law by the Court of Justice of the European Union. The CJEU has used the preliminary references from national courts to considerably enlarge the harmonisation's scope and depth. Its encroachments into national legal systems have gone very far, perhaps too far.

The area of banking and financial contracts provides a vivid example. Not only did the CJEU declare various types of clauses in such contracts as 'unfair', from variable interest rate clauses to loan denominations in a foreign currency. In a bid to deter the use of unfair clauses, it has also prohibited Member State courts from using their general rules of private law to fill the ensuing gap in the contract. It has furthermore ordered national courts to verify the existence of unfair clauses on their own initiative (ex officio), independent of an invocation by the consumer, and required such control not only in the phase of adjudication, but also in enforcement. It has also extended national statutes of limitation in order to allow unfairness control long after the contractual performances have been rendered.

The case law of the CJEU is diverse, complex, and not always free from contradictions. This has caused much consternation among national courts, as a book titled 'Unfair Terms in Banking and Financial Contracts' that we have edited has shown (presented in this blog here). It includes 14 contributions from Member States – besides others from the UK, Switzerland and Norway –, which illustrate the problems national courts face when trying to implement the CJEU guidelines in their national law. The perhaps most surprising finding is that some courts do not apply the UTD at all in the area of banking and finance (eg Sweden) or with particular rigour (eg Germany).

This has led us to conclude that the UTD urgently needs reform. In an article published in the European Private Law Review (ERPL), we have suggested to transform the Directive into a Regulation. We see the advantages in the following: A Regulation would avoid the need to submit preliminary questions through the lenses of national legal systems and thus eliminate a layer of complexity in the case law. The CJEU could on its basis directly decide on the fairness or unfairness, and validity or invalidity, of particular clauses. Those that have been cleared could be used throughout the EU, without the danger of being invalidated by the courts of a Member State. This would be a big leap forward for the integration of the internal market.

We will present our conclusions during a book launch at Oxford University's Harris Manchester College on Thursday, 25 April 2024, at 1:30 PM BST. We will be joined by Professor Severine Saintier, Professor Gerard McMeel KC, Professor Hugh Beale, and Professor Kristin van Zwieten. More details can be found here.

Danny Busch is the Financial Law Chair at Radboud University Nijmegen.

Matthias Lehmann is a Professor of Private Law, Private International Law and Comparative Law at University of Vienna.