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Case C-125/18, "Marc Gomez del Moral Guasch vs. BankiaSA" concerns a request to the European Court of Justice(the "ECJ") for a preliminary ruling from Juzgado dePrimera Instancia No 38 de Barcelona (Court of First InstanceNo. 38, Barcelona, Spain) in relation to the fairness or otherwiseof a contractual term governing the variable ordinary andremunerative interest rate in a mortgage loan agreement.

Under the agreement in question, the interest rate payable by MrGomez del Moral Guasch was to vary according to the reference indexbased on the mortgage loans granted by the Spanish savings banks,which index is provided for by Spanish law. The indexing of thevariable interest rates calculated on the basis of the referenceindex was less favourable than that calculated on the basis of theaverage Euro Interbank Offered Rate (Euribor) and, thus, Mr Gomezdel Moral Guasch argued that a term in a mortgage loan agreementstating that the interest is to vary according to the referenceindex provided under Spanish law was unfair.

The Spanish Court referred three questions to the ECJ:

The Court noted that article 1(2) of the Directive excludes fromits scope contractual terms that reflect mandatory statutory orregulatory provisions. However, the Court observed that thenational legislation applicable in the present case did notrequire, for variable-interest-rate loans, the mandatory use of anofficial reference index, but merely established the conditions tobe satisfied by 'the reference indices or rates' in orderfor them to be used by credit institutions. Therefore, the Courtconcluded that where national legislation does not provide eitherfor the mandatory application of an interest rate based on areference index or for the supplementary application thereof, inthe absence of any other arrangement between the parties to thecontract, a contractual term in a mortgage loan agreement statingthat the interest payable by the customer shall vary according tothat reference index is considered an unfair contractual term interms of the Directive.

Article 4(2) of the Directive provides that the"assessment of the unfair nature of the terms is not torelate, inter alia, to the definition of the main subject matter ofthe contract, in so far as the terms are in plain, intelligiblelanguage". The Court concluded that although thisprovision of the Directive was not transposed into Spanish law; (i)contractual terms must always satisfy the requirement of plain andintelligible drafting; and (ii) national courts are always requiredto verify that a contractual term relating to the main subjectmatter of a contract is plain and intelligible regardless ofwhether or not the Member State concerned transposed article 4(2)of the Directive into national legislation.

Furthermore, the Court concluded that in order to satisfy therequirement of plain and intelligible drafting, a contractual termsetting a variable interest rate in a mortgage loan agreement mustnot only be formally and grammatically intelligible but must alsoenable an average consumer, who is reasonably well-informed,observant and circumspect, to be in a position to understand thespecific functioning of the method used for calculating that rateso as to enable the consumer to understand the potentiallysignificant economic consequences of such a term on his or herfinancial obligations.

The Court observed that articles 6(1) and 7(1) of the Directivedo not preclude a national court from removing an unfair term froma contract and replacing it with a supplementary provision undernational law. Therefore, the Court concluded that if it is foundthat the term at issue is unfair, the Spanish Court may, in orderto protect the consumer from unfavourable consequences liable toarise from the annulment of the loan agreement, replace that unfairindex with a supplementary index provided for by Spanish law.

The key takeaways from this ruling which is likely tocause a number of lending institutions to review and re-think thedrafting of any credit agreements falling within the scope of theDirective - are the following:

(1) Where a provision in a consumer contract is made in terms ofnational law and does not constitute a mandatory statutoryprovision, it may still be considered to be unfair and will notfall within the exception provided under article 1(2) of theDirective;

(2) Contract terms must always be drafted in plain andintelligible language and national courts will always be in aposition to verify whether this requirement was satisfied,regardless of the manner in which the Directive was transposed intonational law;

(3) National courts may, subject to the principles of contractlaw, prevent the continued use of an unfair contract term andreplace it with a supplementary provision of national law in caseswhere the unfair term leads to nullity of the contract andpotential adverse consequences in respect of the consumer.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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ELVINGER HOSS PRUSSEN, socit anonyme

On 22 December 2017, the Grand Ducal Regulation of 21 December 2017 relating to the fees to be levied by the CSSF which repeals the Grand Ducal Regulation of 28 October 2013 was published in the Mmorial A.

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The Court Of Justice Of The European Union Gives Preliminary Ruling On Unfair Terms In A Mortgage Loan Agreement - Finance and Banking - European...