When are unilateral modification clauses in mortgage terms unfair?

In this newsletter we will discuss the use of unilateral modification clauses in mortgage terms on the basis of a ruling of the Dutch Supreme Court (Hoge Raad, the Supreme Court) dated 22 November 2019 (ECLI:NL:HR:20191830). This ruling concerns unilateral modification clauses on the basis of which the bank has the right to increase the variable interest rate (equal to the one-month Euribor rate).

Judgement of the Supreme Court

In this case, two foundations have started collective proceedings against ABN AMRO Bank N.V. (the Bank). The foundations argue that certain unilateral modification clauses in the Bank’s mortgage terms qualify as unfair within the meaning of Directive 93/13/EEG (on unfair terms in consumer contracts, the Directive). The Amsterdam Court of Appeal (gerechtshof Amsterdam) has awarded this claim and qualified the unilateral modification clauses as unfair. The Bank has appealed (in cassatie gekomen tegen) this judgement of the Amsterdam Court of Appeal.

Legal framework

For the assessment of this case, the following legal framework is relevant, in which regard, it is important to note that the borrowers (leningnemers) qualify as consumers (consumenten). The Directive The Directive states that a clause qualifies as unfair if such a clause has not been individually negotiated and, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer. In addition, the Directive states that written clauses should be formulated in clear and plain language (also known as the “transparency requirement”). A consumer should be informed in a clear and understandable manner regarding the terms and consequences of the clauses included in the contract prior to concluding the contract. The annex to the Directive lists an indicative, non-exhaustive list of clauses which could be qualified as unfair. One of the clauses included in this list is the clause which has the objective to enable the seller to unilaterally amend the terms of the contract without a valid reason. However, an exception in relation to the aforementioned has been included for financial service providers (such as banks). Such financial service providers may reserve the right to amend the interest rate or the amount which is due in relation to the other costs of the financial services which are to be paid by the consumer without a notice period (opzegtermijn). However, a financial service provider is obliged to inform its counterparty hereof as soon as possible and such financial service provider is obliged to inform its counterparty that it has the right to cancel (opzeggen) the contract immediately. Dutch legislation The Court of Justice of the European Union (Hof van Justitie van de Europese Unie, the “CJEU”) ruled that local courts should assess whether a clause qualifies as unfair within the meaning of the Directive based on the specific circumstances of that case. The Dutch courts assess whether a clause qualifies as unfair based on article 6:233, opening and paragraph a Dutch Civil Code, taking into account all relevant circumstances of that case. In relation to the question under which circumstances a significant imbalance is caused by amending a specific clause contrary to the requirement of good faith, the CJEU ruled that local courts should assess whether the seller reasonably could have assumed that the consumer would have accepted the respective clause if such clause had been separately negotiated in a fair and clear manner. Should the Dutch courts rule that a clause qualifies as unfair within the meaning of the Directive, such clause should be annulled (vernietigd). This is in accordance with the objective of the Directive: ending the use of unfair clauses in consumer contracts. Therefore, it is not possible that a court (i) revises an unfair clause or (ii) that it does not qualify such a clause as unfair due to the fact that this clause can be left unapplied if the application of this clause would be unacceptable based on the provisions of reasonableness and fairness (redelijkheid en billijkheid, based on article 6:248 paragraph 2 Dutch Civil Code). For completeness sake we note that if no unilateral modification clause has been agreed upon, a bank can only amend the applicable interest rate in the event of exceptional or unforeseen circumstances (uitzonderlijke of onvoorziene omstandigheden, based on article 6:258 Dutch Civil Code).

Decision of the Supreme Court

In the Supreme Court proceedings, one of the arguments made by the Bank is that the Amsterdam Court of Appeal did not take into account that, during the term of the loan, the borrower could convert its Euribor-loan to a different form of interest (in most cases without incurring any costs) or that the borrower could repay its loan in whole or in part at any time without incurring significant costs. In accordance with the argument, the Supreme Court states that the Amsterdam Court of Appeal should have taken these arguments into account whilst assessing all relevant circumstances in respect of the conclusion of the contract and that it should have taken into account all effects of each of the clauses included in the contract. The Supreme Court rules that, on that basis, it should be reassessed whether these specific unilateral modification clauses qualify as unfair. Further to one of the other arguments made by the Bank, which the Supreme Court did not accept, the Supreme Court makes an interesting remark in relation to the information provided by the Bank. The Supreme Court states that, although the applicable codes of conduct for banks at that time did not contain a general obligation to disclose information regarding the structure of interest rates, the Bank should have disclosed such information to the borrower whilst concluding the contract in order to – in accordance with the transparency requirement – sufficiently inform the borrower. The foundations instituted a conditional incidental appeal (voorwaardelijk incidenteel beroep) should the principal appeal of the Bank succeed. The foundations argue that the Amsterdam Court of Appeal wrongfully ruled that an infringement of the transparency requirement does not have a decisive meaning for the assessment whether a clause qualifies as unfair. The Supreme Court overrules this argument and states that the sole infringement of the transparency requirement cannot have such a decisive meaning so that this would result in the clause being qualified as unfair. In addition, the Supreme Court stated that the Amsterdam Court of Appeal did not wrongfully conclude that an infringement of the transparency requirement can – under certain circumstances – have a decisive meaning for the assessment whether a clause qualifies as unfair. The Supreme Court does not substantiate whether or not the unilateral modification clauses of the Bank qualify as unfair. The Supreme Court annuls the ruling by the Amsterdam Court of Appeal and refers the case to the Court of Appeal of Hague. The latter will have to answer the question whether these specific unilateral modification clauses qualify as unfair, in which respect it should take into account the argument of the Bank, entailing that the borrowers had the possibility to convert its Euribor-loan and to repay its loan in whole or in part in each case without incurring significant costs.

How will this affect you?

For both parties (being the bank, and the consumer who intends to invoke the unfairness of a clause) it is important whether the consumer has been informed about the consequences of the unilateral modification clauses in the mortgage terms in a clear and understandable manner prior to the conclusion of the contract. Although this transparency requirement is of material importance, it is not decisive in respect of assessing whether a unilateral modification clause is unfair. All other circumstances should be taken into account as well. Please do not hesitate to contact our Banking & Finance teamBanking & Finance team if you have any further questions regarding the consequences of this ruling by the Supreme Court.