Mortgagees, statutory remedies and the unfair terms directive

23 May 2014

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Will the recent decision in Barclays Bank SA v Garcia give mortgage lenders and their advisors more confidence that they can enforce their security under English law without interference from the unfair terms directive?

Original news

Barclays Bank SA v Garcia and another, Court of Justice of the European Union (Sixth Chamber): Case C-280/13 [2014] All ER (D) 116 (May)

In proceedings in Palma de Mallorca, Spain, the respondents (mortgagors) objected to the claimant (mortgagee) exercising its rights of sale as mortgagee in possession under Spanish law on the basis that they were inconsistent with Directive 93/13/EEC of 5 April 1993 (the directive). The Spanish court referred the issue to the CJEU. The CJEU held that, unlike contractual terms, the directive did not apply to statutory and regulatory provisions of member states.

What was the background?

The mortgagee received an assignment of a debt owed by the mortgagors, which was subsequently increased. The original loan was for €91,560. The debt was secured by a mortgage over the mortgagors’s dwelling (secured property). The mortgage contained a term providing that, in the event of any auction of the secured property, the reference value of the secured property would be €149,242.80. The loan was increased to €153,049.80.

What was the dispute?

The mortgagors defaulted in the repayment of the loan and the mortgagee demanded payment of €148,142.83 in principal, €1,689.95 in interest and €45,003 in interest and costs. The Spanish court ordered the secured property to be repossessed in December 2010.

In May 2011 the secured property was auctioned but no bidders were present. The secured property was awarded to the mortgagee as dictated by Spanish law at a value of €74,621.40, that is, 50% of the agreed value of the secured property at the time the mortgage was granted.

In October 2012 a further order was made authorising the continuation of the enforcement proceedings against the mortgagors for the balance owing to the mortgagee.

The mortgagors objected to the valuation of the secured property and the continuation of proceedings in accordance with Spanish law on the basis that they were inconsistent with the directive.

The Spanish court referred four questions to the CJEU. The CJEU considered the four questions together by distilling them into one question as follows:

‘...whether Directive 93/13 and the principles of EU law on consumer protection and a balance in the parties’ contractual rights and obligations must be interpreted as meaning that they preclude the laws and regulations of a Member State, such as those at issue in the main proceedings...’

What are the relevant laws?

As so far as is relevant, Spanish law governing the enforcement of security provides:

a mortgage may be created as security for all types of obligations and the mortgage will not alter the unlimited personal liability of the debtor
the parties may nevertheless agree that obligations secured will only be effective against the asset/s mortgaged
if a mortgaged asset or assets are sold and the proceeds are insufficient to cover a debt, the creditor may apply for enforcement in respect of the shortfall against the debtor
if there are no bidders at a creditor’s auction, the creditor may apply for the award of the asset at a value equal to, or greater than, 50% of the sum at which it was valued or at a value equal to the amount the creditor is owed

The directive:

the thirteenth recital to the preamble provides:

‘Whereas the statutory or regulatory provisions of the Member States which directly or indirectly determine the terms of consumer contracts are presumed not to contain unfair terms; whereas, therefore, it does not appear to be necessary to subject the terms which reflect mandatory statutory or regulatory provisions and the principles or provisions of international conventions to which the Member States or the Community are party; whereas in that respect the wording “mandatory statutory or regulatory provisions” in Article 1 (2) also covers rules which, according to the law, shall apply between the contracting parties provided that no other arrangements have been established (emphasis added)’,

and

Article 1 provides:

'(1) The purpose of this Directive is to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer.
(2) The contractual terms which reflect mandatory statutory or regulatory provisions and the provisions or principles of international conventions to which the Member States or the Community are party, particularly in the transport area, shall not be subject to the provisions of this Directive.’

What did the court decide?

The CJEU, consisting of the President of the Chamber A Borg Barthet (Malta), E Levits (Latvia) and S Rodin (Croatia) distinguished prior decisions on the impact of the directive on contractual terms (and legislation limiting the powers of courts to review contractual terms). Those decisions were not relevant. The mortgagee was not relying on contractual terms. It sought to enforce its statutory rights under Spanish law.

In these circumstances, the directive had no application. This was mandated by both art 1(2) and the thirteenth recital in the preamble.

What can restructuring and insolvency professionals take from this case?

The relevance of the decision to English law is most apparent for lending and mortgages. The decision may give lenders and their advisers confidence that they can enforce their statutory rights under English law without interference from the directive. This could include rights under the Law of Property Act 1925, including ss 91, 101, 103, 105, 106 and 107 relating to a mortgagee’s power of sale. Contractual rights which augment those limited statutory rights would not, however, evade the directive so easily. One example may be the appointment of a fixed charge receiver which is a contractual remedy provided for in the security documentation.

It may be that other, more general, conclusions can be drawn. One could be that statutory rights of traders against consumers beyond the banking and finance context should be exempt from the directive. These would be few and far between. The Sale of Goods Act 1979, s 37, may provide one example (although it would be hard to argue against its fairness). Another conclusion could be that it is wrong to assume that judges of the CJEU will always prefer their own idiosyncratic notions of justice and fairness at the expense of the plain meaning of a directive. As against this, because the directive in this case centres on fairness and gives little guidance on what this means in a given case, instances where the meaning of the directive is clear may be rare.