Judgment of the Court of Justice (First Chamber)
On 11 September 2019, the Court of Justice (First Chamber) delivered its opinion in the Polish case Lexitor sp. z o.o. (C-383/18) interpreting Article 16(1) of EU Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers following the opinion of Advocate General Hogan which was delivered on 23 May 2019.
Article 16 provides that in the event of an early repayment of credit in accordance with a credit agreement, the creditor shall be entitled to fair and objectively justified compensation for possible costs directly linked to early repayment of credit, provided that the early repayment falls within a period for which the borrowing rate is fixed.
The request to the Court of Justice (First Court) by AG Hogan for a preliminary ruling concerned the conclusion of a credit agreement between the consumer and three banks, whereby the credit agreement entered into with consumers was for a given period with a commission rate charged on such agreements, the amount of which was independent of the duration of the contract. The consumers had repaid the full amount of the credit granted before the date indicated in the agreements and the question which was raised was whether the consumers who had paid off their credit early are entitled to the repayment of the part of the commission, proportionate to the repayment period, or whether such a cost which does not depend on the duration of the agreement is outside the scope of credit costs.
This case looked into the application of a consumer’s entitlement to a reduction in the total cost of the consumer credit, such reduction consisting of the interest and the costs for the remaining duration of the contract, where such consumer has made an early repayment of a sum due in accordance with a credit agreement. The interpretation of the case was specifically in relation to the notion of ‘remaining duration of the contract’.
AG Hogan’s interpretation of the provision of the Directive relating to the reduction of the cost of credit, was that such reduction should correspond to the expenses that the credit institution will not have to bear due to the early repayment, however from a practical aspect, the difficult in this approach lies in the fact that credit institutions rarely specify which of the expenses that they bear are covered by the costs that they charge consumers, and even in instances where they do so, the consumer would still be granted the right to dispute the accuracy of such costs. In order for such costs to be accurately calculated, the credit institution will need to carry out a cost accounting exercise to identify its net operating income.
The applicants instituted proceedings before the referring court seeking an order to require the defendants’ reimbursement of the previously paid commission, together with statutory interest for late payment.
Following an early repayment of their loans, the consumers had assigned to Lexitor, a company governed by Polish law, their claims against the banks relating to the early repayment of the loans.
As the credit institutions did not accede to the requests, Lexitor brought three actions before the referring court against the respective banks seeking a request to order the banks to pay part of those commissions relating to the remaining duration of each of the credit agreements, together with default interest amounts.
In AG Hogan’s analysis, it was noted that the provisions of the Directive do not lay down the method of calculation of the reduction which is to be used by Member States, but rather gives Member States a certain latitude on the matter. In doing so, however, they must respect the principles laid down in the Directive regarding the obligation to cover both interest and costs.
AG Hogan further analysed that the possibility of claiming compensation in accordance with the provisions of the Directive is intended only to offset the expenses incurred as a result of the early repayment of the credit when specific operations must be undertaken by the credit institution.
The hearing of the opinion of AG Hogan in its preliminary ruling decided on the 23 May 2019 proposed that the Court of Justice (First Chamber) should answer the following question: where a consumer has made an early repayment, whether the reduction to which that consumer is entitled to may concern costs for which the amount does not depend on the duration of the credit agreement and whether a Member State may limit the reduction simply to the amount of expenses which would have been saved by the credit institution as a result of the early repayment.
With respect to the query surrounding the interpretation of whether the consumer has a right to a deduction of the total cost of the credit in the event of an early repayment, the Court of Justice (First Chamber) concluded that this must be interpreted as meaning the reduction in the total cost of the credit includes costs which are not dependent on the duration of the contract, reason being that the definition of ‘total cost of the credit’ does not include a restriction relating to the duration of the credit contract at issue.
The referring court, in its interpretation of Article 16(1) ruled that the right of the consumer to a reduction in the total costs of the credit in the event of an early repayment of the credit is to include all the costs imposed on the consumer and should not be interpreted in a restrictive manner.