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The recent decision of the European Court of Justice in the case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai versus OTP Jelzálogbank Zrt combined with the empowerment and almost equation of the exchange rate of Swiss Franc and Euro, has spurred the issue of the conclusion of loans in Swiss Francs in a crucial issue for many borrowers – not only in Cyprus. In this respect, the conclusion of loan agreements in Swiss Francs has already received a huge social and political dimension.
What is, however, important and worth having knowledge about, especially for those who have concluded loan agreements with Banks in Swiss Franc, is the decision in the Kásler case.
According to the case in question, Kásler and Káslerné Rábai have concluded a loan agreement with a hungarian bank, which provided, among others, that: «the lender [namely the bank] is to determine the amount in HUF of each of the monthly instalments due by reference to the selling rate of exchange for the foreign currency applied by the bank on the day before the due date».
The European Court of Justice, relying on the Directive 93/13/EEC, held, inter alia, but most importantly that the above-mentioned clause of the loan agreement is unfair due to its vague and incomprehensible wording. More specifically, the Court has established the principle that:
«as regards a contractual term such as that at issue in the main proceedings, the requirement that a contractual term must be drafted in plain intelligible language (article 4.2 of the Directive) is to be understood as requiring not only that the relevant term should be grammatically intelligible to the consumer, but also that the contract should set out transparently the specific functioning of the mechanism of conversion for the foreign currency to which the relevant term refers and the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan, so that that consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it».
Furthermore, the European Court of Justice acknowledged to the Hungarian Court the ability to replace the unfair and invalid clause with a national default provision, provided that the national legislative order permits so. On this ground, the Hungarian Court decided that the instalments falling due would be paid to the bank on the basis of the Euro – Swiss Franc exchange rate applicable on the day of the conclusion of the loan agreement.
The Directive 93/13/EEC has been incorporated in the Cypriot legislation by the Unfair Terms in Consumer Contracts Act 1996.
It is worth noting that both the aforementioned legislation and the decision of the European Court of Justice are not applicable to all loan agreements. The Act in question only applies in relation to such contractual clauses that have been concluded between a bank and one or more consumers and which has not been individually negotiated, in the sense that the clause and/or the contract to which the clause forms part, has been drafted in advance and the consumer has therefore not been able to influence the substance of its content, even if he made an effort to do so.
In order to assess the unfairness of such a contractual clause, the Court takes into account the nature of the offered services, the prevailing circumstances at the time of the conclusion of the loan agreement and all the other clauses of the contract in question.
Of course, another factor of major importance that the Court takes into account is whether and, if so, at what extent the consumer/borrower has been induced by the bank to conclude the loan agreement in Swiss Franc (as it is the case in the majority of loan agreements.)
Referring back to the decision of the European Court of Justice in the Kásler case, it is important to mention that the Court has not established a principle on unfairness of absolute and universal application and has neither suggested that all contractual clauses, included in loan agreements, providing for the calculation of instalments falling due on the basis of the exchange rate applicable on the day of the payment of the instalment or, in any case, on the basis of an exchange rate different from the one on the day of the conclusion of the contract, should be considered as invalid.
Nevertheless, the decision clearly and rigorously defines that a clause in a loan agreement providing for the calculation of the instalments must present, in a transparent, clear and comprehensible to the borrower way, the conversion mechanism of Swiss Francs in Euros, the way of its operation and also the relationship between that mechanism and the release mechanism of the loan so that the borrower to be able to weigh the potential risks and assess in a clear and comprehensive way the financial effects and the meaning of concluding a loan agreement in Swiss Francs.
Certainly, although a clause, which merely provides that the monthly instalments for the repayment of a loan will be paid in Euros on the basis of the exchange rate of Euro – Swiss Francs or the selling price of Swiss Franc on the day of payment of the instalment, is grammatically correct and thus understandable, it is regarded as unfair. This mainly occurs since there is no mechanism of clear and comprehensive explanation to the borrower of the way of calculation of the financial impacts, positive or negative, which are involved in a decision to conclude a loan agreement in Swiss Francs.
Admittedly, the aforementioned decision of the European Court of Justice has equipped the borrowers with a strong negotiating means against the banks. Therefore, the borrowers are advised to use it properly in order to take full advantage of it.
Apart from that European decision, our law firm, through an in-depth study, has reached a series of decisions of foreign national Courts applying to the Common Law legal system. In these cases, the Court indicated that a bank, which has provided a loan agreement in a foreign currency (namely Swiss Franc for our purposes), is obliged to act using reasonable skill and care for the protection of the interests of the consumer who does not possess the special knowledge of how the monetary system and the exchange rate fluctuation work neither is informed about any of the mechanisms for protection against such fluctuations. Although the foreign Court decisions are not binding since they are only used as guidance to the Cyprus Courts, the Cyprus courts tend to be guided and follow foreign decisions, particularly in the absence of respective national decisions.
Taking all the above into consideration, it is our advice to the borrowers and also to the potential borrowers to make use of the decision of the European Court of Justice while negotiating a loan agreement with the bank. Of course, it would be better for the borrowers, at first instance, to obtain legal advice in order to be informed as to whether they can proceed on the basis of that decision. In any case, however, the borrowers must be extremely careful before signing any of the documents presented to them by the bank. Obviously, banks will attempt to convert all the loan agreements concluded in Swiss Francs in Euros in order to avoid the possibility that the borrower may require, through negotiations or through civil actions, the application of the exchange rate of Swiss Franc – Euro on the day of the conclusion of the loan agreement.
A. Karitzis & Associates LL.C is sufficiently informed and remains always at the disposal of the borrower for legal advice in relation to the extent of his individual rights against the bank and also for guidance on the way of negotiating a loan agreement with the bank. At this point of time, except for providing legal advices, our law firm, following instructions from its clients, has already initiated preparing and filing civil actions against banks for loan agreements concluded in Swiss Francs.
Having in mind that the general concern regarding the loan agreements concluded in Swiss Francs, our lawyers are at your disposal for any questions and/or clarifications concerning the issue in question without any commitment from your side.