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UNFAIR TERMS IN CONSUMER CONTRACTS

12 June 2013

In RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen e.V. (Case C-92/11) when considering contractual terms which give a supplier the right to unilaterally vary the terms of a consumer contract, the Court of Justice of the European Union (First Chamber) (the ECJ) has provided some helpful guidance on the interpretation of the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (the Unfair Terms Directive), confirming its broad scope and limiting the effect of such unilateral variation clauses.

While this decision was made following a referral from the German courts in relation to contracts for the supply of natural gas, this case has important implications for any business supplying consumers in the EU – especially where their standard contracts give them the right to unilaterally vary aspects of the contract (and in particular where it gives the right to vary price).

Background

At all relevant material times, German legislation allowed for two different forms of gas supply contracts: regulated supply contacts governed by the Regulation on general terms and conditions for the supply of gas to standard tariff customers (the AVBGasV); and unregulated supply contracts entered into on the basis of freedom of contract (Special Contracts). The AVBGasV incorporated wording into every regulated contract which allowed gas suppliers to unilaterally vary gas prices without stating the grounds or conditions of the variation, provided that the consumer was informed of the variation and was free to terminate the contract if it chose to. While the scope of AVBGasV did not extend to Special Contracts, many gas suppliers, including RWE Vertrieb AG (RWE) chose to include identical language in the Special Contracts.

Relying on this incorporated wording, RWE increased its prices four times in the period from 1 July 2003 to 1 October 2005. While the affected consumers were notified of the increase and had the technical right to terminate their existing contracts with RWE, the state of the market was such that in practice there was no possibility of changing gas suppliers. The respondent, a consumer association acting on behalf of the affected consumers, then commenced proceedings against RWE in the German courts to recover the additional amounts paid to RWE following the price increases. This ultimately lead to a referral from the German Federal Court of Justice to the ECJ on two questions:

  1. where a contract to which national legislation does not apply (ie the Special Contracts), reproduced unchanged wording prescribed by statute applicable to another category of contracts, will that reproduced wording be subject to the Unfair Terms Directive; and
  2. if the Unfair Terms Directive does apply, will a contract for the supply of natural-gas be "unfair" if it gives the supplier the ability to unilaterally vary the gas price, without indicating the grounds, conditions or scope of such a variation, notwithstanding that the consumer is informed of the variation in good time and has the right to terminate the contract if the consumer does not accept the variations?

Question 1

RWE based its arguments in relation to the first question on an interpretation of Article 1(2) of the Unfair Terms Directive. Article 1(2) states that contractual terms which reflect mandatory, statutory or regulatory provisions of national law will not be subject to the Directive, as there is a presumption that the national legislature struck a balance between all the rights and obligations of the parties to a certain category of contracts. It was accepted that the operation of Article 1(2) meant that the Unfair Terms Directive would not apply to the price variation clause prescribed into regulated supply contracts by AVBGasV, and RWE argued that since the wording in the Special Contracts was identical to that set out in AVBGasV the Directive should not apply to Special Contracts either.

The ECJ rejected this argument finding that:
(a) the extension by the parties of a national law (ie AVBGasV) in relation to one category of contracts (ie regulated supply contracts), to a contract outside the scope of that national law (ie the Special Contracts) cannot be equated to the establishment by the national legislature of a balance between all the rights and obligations of the parties; and
(b) if it were permitted to exclude the application of the Unfair Terms Directive to a contract merely because that contract reproduces or refers to national statutory or regulatory provisions that do not apply to that contract, this would call into question the system of consumer protection established by the Directive by giving suppliers the ability to easily avoid review of the unfairness of terms.

The German legislature had made the decision to exclude the Special Contracts from the scope of AVBGasV, and an election by the parties to mirror the wording of AVBGasV was not sufficient to exempt the Special Contracts from the application of the Unfair Terms Directive via Article 1(2).

Question 2

On the second point the ECJ again rejected RWE’s arguments, noting that the system of protection established by the Unfair Terms Directive was based on the idea that the consumer is in a weak position vis-à-vis the supplier as regards both his bargaining power and level of knowledge – and that it was therefore essential that the customer was given the chance to view all the terms of the contract before entering into it, including those setting out the reason for and method of variation of the price. A lack of information on this point cannot, in principle, be compensated for by the mere fact that consumers will, during the performance of the contract, be informed in good time of a variation of the charges and of their right to terminate.

Stressing that it was for the national courts to determine whether a particular term was unfair or not in all the circumstances, the ECJ also noted that in making this decision the national court should consider, as a point of "fundamental importance", whether the right of termination given to the consumer is purely formal or can, in all the circumstances, practically be exercised.

Comment

This case highlights a resistance on the part of the ECJ to narrow the scope or effect of the Unfair Terms Directive. While this case was decided in relation to the supply of natural gas contracts, there is nothing in the judgment to suggest that it wouldn’t have wider application and therefore helpfully confirms that:
(i) suppliers will be unable to escape the effect of the Unfair Terms Directive simply by incorporating statutory prescribed terms into a contract to which the relevant statute does not apply; and
(ii) contractual terms which allow a supplier to unilaterally vary the contract, risk being found to be unfair (and thus void) where they don’t set out both the reason for and method of the variation of the changes so that the consumer can foresee the alterations that may be made, and give the consumers an effective right to terminate the contract.

Therefore, while of obvious significance to any business involved in supplying gas in Germany, the decision has a wider importance and all suppliers operating in the EU should consider a careful review of any contractual terms which give them the right to unilaterally vary consumer contracts. In particular, thought should be given to whether a consumers’ right to terminate a contract in the event of a variation is an effective one such that, in practice, the consumer will actually be able to exercise such right. Factors which the ECJ suggested would be of significance in determining whether a right is effective or not, include:

  • whether the particular market concerned is competitive;
  • the possible cost to the consumer of terminating the contract;
  • the time between notification to the consumer and the variation coming into force;
  • the extent of detail provided at the time of notification of the consumer; and
  • the cost to be borne and the time to be taken in changing supplier.

If this is not the case then suppliers should think twice before making use of any unilateral variation clause as to do so would give rise to the risk of a successful challenge in the courts at a later stage.
Suppliers should also make sure that any new unilateral variation clauses they negotiate in consumer contracts are in line with this guidance and provide both: (i) potential reasons for and methods of variation; and (ii) ensure an effective right to terminate prior to variation, notwithstanding any provisions of national law which apply to a different category of contracts.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.