EU Court Ruling on the ‘Swiss Franc Case’ Binding for All National Courts of Union Member States

In approving loans in foreign currency, the financial institution must provide the borrower with sufficient information, including potential risks and the likelihood of their occurrence, so that they can make a prudent and informed decision, states the ruling of the EU Court, which could be of crucial importance for debtors in Swiss francs.

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The EU Court responded to a request from an appellate court in Romania that was addressing a lawsuit from debtors in Swiss francs.

The court states in a press release that during 2007 and 2008, Ruxandra Paula Andriciuc and other individuals, who were then receiving their income in Romanian lei, entered into loan agreements in Swiss francs with the Romanian bank Banca Românească for the acquisition of real estate, refinancing other loans, or for personal needs. According to the loan agreements made by the parties, borrowers were obliged to repay monthly loan installments in Swiss francs and assumed the risk related to potential changes in the exchange rate of the Romanian leu against the Swiss franc. Subsequently, this exchange rate significantly changed to the detriment of the borrowers.

They turned to Romanian courts to determine that the contractual provision requiring the loan to be repaid in Swiss francs without considering any potential loss that borrowers may suffer due to exchange rate risk is an unfair contractual provision that does not bind them, in accordance with what is prescribed by an EU directive.

The borrowers emphasized in their lawsuit that the bank, when concluding the contract, presented its product biasedly, as it highlighted only the benefits that borrowers could have, without mentioning the possible risks and the likelihood of their occurrence. According to the borrowers, the disputed contractual provision, given the bank’s practice, should be considered unfair.

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In today’s ruling, the EU Court determined that the “disputed contractual provision is part of the main subject of the loan agreement, so its unfairness can be examined in relation to the Directive only if it is not drafted clearly and understandably. Namely, the obligation to repay the loan in a specific currency is an essential element of the loan agreement as it does not relate to an ancillary (attached, supplementary) method of payment, but to the very nature of the debtor’s obligation.”

In this regard, the Court reminds that the requirement that the contractual provision must be drafted clearly and understandably also requires that the contract transparently presents the specific functioning of the mechanism referred to by the relevant provision. If necessary, the contract must also explain the relationship between that mechanism and the one established by other provisions, so that the consumer can assess the economic consequences arising from it based on accurate and understandable criteria. The EU Court concludes that this issue must be examined by the Romanian court in light of all relevant factual elements, including advertising and information made available by the lender during the negotiations for concluding the loan agreement.

– It is up to the national court to verify whether all elements that could affect the scope of the consumer’s obligation have been communicated to the consumer, based on which they can assess the total cost of their loan, states the EU Court’s press release.

The Court explains that financial institutions must provide borrowers with sufficient information to enable them to make prudent and informed decisions. This information must relate not only to the possibility of appreciation or depreciation of the loan currency but also to the impact that exchange rate changes and increases in interest rates in the loan currency may have on its repayment.

– Therefore, on one hand, the borrower must be clearly informed of the fact that by entering into a loan agreement in foreign currency, they are exposing themselves to a certain exchange rate risk that they will economically struggle to bear in the event of a decline in the value of the currency in which they earn their income. On the other hand, the bank must present possible exchange rate changes and risks inherent in taking a loan in foreign currency, especially if the borrower does not earn their income in that currency, states the EU Court.

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The Court also emphasizes that in cases where the bank has not fulfilled these obligations, and consequently, the unfairness of the disputed contractual provision can be examined, it is up to the national court to check, on one hand, the possible bank’s non-compliance with the requirement of acting in good faith and, on the other hand, the existence of a possible significant imbalance between the contracting parties. This assessment should be conducted with regard to the moment of concluding the contract and taking into account especially the expertise and knowledge of the bank regarding possible exchange rate changes and risks inherent in concluding a loan agreement in foreign currency. In this regard, the Court emphasizes that a contractual provision can introduce an imbalance between the parties that only becomes apparent during the execution of the contract.

Today’s decision of the EU Court binds national courts before which a similar question could arise as in the Romanian case, states the press release.