Unfair Contract Terms Directive in financial services – Anneli Howard acts for UK Government in preliminary reference on transparency and fairness requirements and remedies in Spanish mortgages disputes

24 Mar 2020
Anneli Howard KC

Case C-125/18, “Marc Gomez del Moral Guasch vs. Bankia SA

Earlier this month, the Grand Chamber of the European Court of Justice (ECJ) ruled on the legal test for assessing the transparency and fairness requirements for mortgage interest rates under the Unfair Terms in Consumer Contracts Directive 93/13 (UCTD).

Case C-125/18, “Marc Gomez del Moral Guasch vs. Bankia SA” concerned a multi-question request from the Barcelona court to the ECJ for guidance on what information must be provided to a consumer at the time of entering into a variable interest rate (in the context of a long term mortgage agreement) in order to meet the plain and intelligible language test. The reference involved a test case, following multiple litigation proceedings challenging variable rates based on the official Spanish average “IRPH” rate which is much higher than the Euribor rate. In Spain, over 1 million borrowers have IRPH loans totalling over 15.5 bn euros.

Application of UCTD

In response to the three questions referred to the ECJ by Spanish courts about an allegedly unfair mortgage deal, the ECJ found variable mortgage rates, which are not mandated by law, fall within the scope of the UCTD. Even if the UCTD had not been fully implemented into domestic law, EU consumer law requires Member States to ensure mechanisms by which national courts have the power to scrutinise the fairness of all contractual terms that have not been individually negotiated. National courts must therefore review, by reference to the particular circumstances of the case, whether such terms meet the requirements of good faith, balance and transparency laid down in the UCTD.

Transparency requirements

So far as transparency is concerned, regardless of the exception in Article 4(2), national courts must ensure that contract terms and drafted in plain intelligible language so that an average consumer, who is reasonably well-informed and reasonably observant and circumspect, is in a position to understand the specific functioning of the method used for calculating the variable interest rate and thus evaluate, on the basis of clear, intelligible criteria, the potentially significant economic consequences of such a term on his or her financial obligations. The precontractual information and promotional materials are important in that regard to communicate all the information likely to have a bearing on the extent of the borrower’s commitment, the nature of the services provided and the to enable the consumer to estimate the total cost of the loan.

The ECJ accepted that, by definition, variable rates mean that it is not always possible to set out the amount of the loan repayments for the entire term of the agreement. It would be sufficient to refer the borrower to a published index (such as the IRPH) that was easily accessible to the average consumer and to other essential information that was published or required to be circulated to the borrower concerning the calculation or fluctuation of the rate.

Importantly, the ECJ underlined that fairness and transparency are fact specific and national courts will be responsible for deciding the legality of financial contracts terms on a case-by-case basis.


The third question raised the issue of remedies if a contract term is found to be unfair and consequently null and void. Article 6 of the UCTD requires the national court to “exclude” or strike out that clause so that it can no longer produce any binding effects against the consumer. The ECJ confirmed that national courts are not allowed to modify or re-write the terms of the contract as that would dissuade lenders from complying with consumer protection law if they could seek their subsequent judicial amendment.

Crucially, the Grand Chamber recognised that the removal of certain terms could lead to the annulment of the loan agreement in its entirety which could put the consumer in a worse position than the situation with the unfair clause in place. For instance, the invalidity of the mortgage might mean that the entire loan became immediately repayable in full, forcing the borrower to sell his home. In such circumstances, where the invalidity of the term created unfavourable circumstance to the detriment of the borrower, the national court is permitted to substitute the unfair term (here a variable interest rate) with a statutory index provided by national law.

The outcome is likely to cause a number of lending institutions to review and re-think the drafting of any credit agreements and the clarity of any precontractual and promotional materials falling within the scope of the UCTD.

Read full judgment here.

Anneli Howard acted for the United Kingdom Government whose observations on remedies were upheld by the ECJ.