Consumer Protection in Consumer Loans (Unfair Terms)
n April 1993 the Council of Europe issued Directive 93/13/ΕEEC on unfair terms in consumer contracts between consumers and persons or entities providing goods or services as part of their business activities (providers). For the purposes of the Directive, services include consumer loans entered into between banks and consumers.
Cyprus implemented the Directive into national law in 1996 by enacting the Unfair Terms in Consumer Contracts Law, which was gradually amended to take into account the increasing need to protect consumers’ rights. The Law integrates the Directive’s principles on establishing whether a term is unfair and the effect of such a finding on the rights and obligations of the contracting parties.
The Law itself provides an indicative list of types of terms that may be considered unfair, of which the following are of particular interest with regards to consumer loan contracts:
- Terms excluding or limiting legal rights of the consumer against the provider (i.e. a bank) in the event of non-performance of contractual obligations of the provider.
- Terms limiting the right of a consumer to offset amounts owed by the consumer to the provider by virtue of a contractual obligation with claims of the consumer against the provider for a breach of contract.
- Terms inferring the consumers’ acceptance of contractual terms, of which the consumer had no actual knowledge prior to entering the contract.
- Terms by which the provider has the right to unilaterally modify the contract without a valid justification.
- Terms by which the provider has the sole right to interpret a contract term.
- Terms by which the consumer is obligated to perform contractual obligations, despite non-performance by the provider.
- Terms by which a banking institution may demand the loan amount to be immediately paid in full without specific conditions in the contract, and/or conditions specified by any Law.
- Terms by which a disproportionate penalty is imposed on a consumer who is in default (a penalty clause).
- Terms by which a banking institution may charge the loan with amount other than interests or costs deemed necessary for the operation of the loan account and by which terms the amount is added to the installment amount.
- Terms by which yearly interest is calculated on a basis other than a 365 day year.
Courts dealing with a claim that a term is unfair, must first establish whether the contract is one of a consumer nature. Specifically, whether the contracting parties are within the definitions of consumer and provider respectively. For the purposes of the Unfair Terms in Consumer Contracts Law, a consumer is a natural entity, who is acting for purposes not related to his or her business. Therefore, the law’s provisions do not protect legal entities when entering a contract with a provider. On the other hand, for the purposes of this law, a provider is a natural or legal entity who supplies goods or services and enters an agreement for purposes related to his or her business.
The Court must then examine if the term in question was the result of individual negotiation, meaning if the term had already been drafted by the provider and the consumer was not in a position to affect the content of the term. The burden of proof lies on the provider to show that the term was the result of individual negotiation. The use of the same or a similar term in various contracts of the same provider with different consumers, or in contracts made over the course of time, is an indication that the term was not the result of individual negotiation. The same can be said for characteristics of contract documents that indicate a specific contract template.
According to Article 5 of the Law, a term is deemed unfair if despite the requirement to act in good faith, the term creates significant imbalance on the rights and obligations of the parties which is favourable to the interests of the provider. In order to determine if a requirement to act in good faith exists, the Court must take into account the bargaining power of the contracting parties, whether the consumer was urged to agree to the term in question, whether the goods or services where provided by request of the consumer and the degree to which the provider treated the consumer in fairness.
The Court must take into account all circumstances under which the contract was entered into, including information given to the consumer by the provider prior to the consumer loan, and how transparent the terms are by virtue of their wording.
According to Article 9 of the Law, the Director of the Consumer Protection Service (a department within the Ministry of Energy Commerce Industry and Tourism), has a duty to assess whether a consumer contract term is unfair either on his own or following a complaint by a consumer.
The decision of the Director on the matter is not binding on a Court dealing with the same term but such a decision Director may provide useful tools to those who wish to claim that the term is unfair and may aid the Court in establishing whether the term is unfair. The role of the Director is to provide protection to the greater consumer public and the court procedure is the only setting to obtain a legally binding decision with regards to the rights and obligations of a specific consumer against the provider.
If a term is deemed by the Court as unfair based on the above criteria, the term in question will not be binding on the consumer but the rest of the contract terms remain binding on the contracting parties unless the contract may not carry on without the term.
This article is given for information purposes only and it does not constitute legal advice.