Getting to the core of the issue – Court provides guidance on unfair terms

The recent case of Allied Irish Banks plc v Miriam O’Donohoe and Peter O’Donohoe [1] concerned an application by Allied Irish Banks plc (“AIB”) seeking judgment against the defendants on foot of a loan agreement dated 15 July 2009. Miriam O’Donohoe contested AIB’s application on a number of grounds, to include breach of the Unfair Terms in Consumer Contracts Regulations 1995 (the “Regulations”), and in particular the clauses of the loan agreement relating to;

• variable interest rate(s)
• surcharges on arrears
• the right of the lender to enter into possession of the mortgaged property after the execution of the mortgage

The Regulations Council Directive 93/13 EEC of 5 April 1993 on Unfair Terms in Consumer Contracts was transposed into domestic law in 1995. A customer is defined as a person who is acting for purposes which are outside his business. Meenan J. observed that the wording of the Regulations, and the language used, lack the clarity that one should expect from such important customer protection legislation. Case Law In deciding whether the loan agreement contained unfair terms the Court considered a number of authorities.

Aziz v Caixa d’Estalvis de Catalunya[2]

The ECJ considered the applicable Spanish legislation implementing Directive 93/13/EEC. The bank instituted enforcement proceedings against the defendant when he defaulted on his loan. Subsequent to that, the defendant applied and was successful in obtaining a declaration to the effect that the clause replied upon by the Bank was unenforceable under the terms of the Regulations. It was held that if a consumer is in a weaker position vis-à-vis a seller, as regards to his bargaining power and his level of knowledge, an unfair term was not binding on the consumer.

AIB Mortgage Bank and Allied Irish Banks plc v Gerard Cosgrove [3]

In this case it was accepted by Faherty J. that the defendants were not entitled to rely upon the Regulations because where a defendant borrowed money to purchase a premises, the person knew that the sum borrowed had to be repaid with interest and that the sum would be secured by way of a charge on the property. Such terms were considered “core terms”.

Bank of Ireland Mortgage Bank v Mahon and Woods[4]

Counsel on behalf of both parties were in agreement that the Court is obliged to examine the mortgage deed having regard to the Regulations, to establish if any term is unfair. Linnane J. considered it proper to first determine if the Regulations apply. The Court referred to Article 4(2) of the Regulations which provide that the assessment of the unfair nature of the terms shall not relate to the definition of the main subject matter of the contract. The Court held that the Regulations did not apply as “the obligation to pay instalments and repay the loan is the defendants’ main contractual obligation. Once there is default in so doing this entitles the plaintiff to exercise its right to possession.”

Allied Irish Bank plc v Peter Counihan & Mary Counihan[5]

Barrett J. commented that difficulties can arise in a common law jurisdiction where a Court has to consider “of its own motion” whether provisions of a contract are contrary to the Regulations. The Court raised the question as to whether a Court of lesser or equal jurisdiction is precluded from finding clauses in the same terms and conditions as unfair. “It seems to this Court that [a court of appeal] could reasonably be contended not to be so bound because (a) each case will be decided to a great extent on its own facts, and/or (b) ultimately even the demands of precedent must yield to the supremacy of European Union law…” Determination Meenan J. determined in this case that the provisions of the loan agreement relating to loan interest are not in breach of the Regulations, reasoning as follows:

• Article 4 of the Regulations provides that a term will not be considered to be unfair by relation to the definition of the main subject matter of the contract. The Court held that the amount advanced, the term of the loan and the interest that is repayable are the main subject matters of the contract.
• The “grey list” in Schedule 3 of the Regulations covers situations where a supplier of services increases prices, in this case, increasing interest rates. Such may be an unfair term and it would appear to support the defendants’ case. However, Schedule 3 goes on to specifically provide that subparagraph (1) does not apply to “financial instruments and other products or services where the price is linked to fluctuations in… a financial market rate that the seller or supplier does not control.”
• Miriam O’Donohoe, as an employee of AIB, was entitled to a 3 % fixed rate for the term of the loan. She did not have to accept the variable interest rate, rather she chose this rate.
• Meenan J. distinguished the instant proceedings from the ECJ decision of R.W.E. Vertrieb A.G. v Vertraucherzentrale Nortdrhein- Westfalen eV (C-92/11) which the defendants replied upon. That case related to price variant clauses in respect of gas services.
• The Plaintiff indicated that they did not wish to rely upon its entitlement to charge a surcharge interest rate of 6%, in addition to the interest rate charged on arrears or the right of entry of the mortgagee. The Court noted that “even if [they] did and they were contrary to the Regulations, clauses under Article 6(2) are severable.”

Meenan J.  noted in his judgment that he was mindful that the ECJ has stated in Aziz that “the national court is required to assess of its own motion whether a contractual term falling within the scope of the directive is unfair... compensating in this way for the imbalance which exists between the consumer and the seller….”. Ultimately Meenan J. agreed with the reasoning of Barrett J. in Allied Irish Bank plc v Peter Counihan & Mary Counihan “that such an exercise is more appropriate for an inquisitorial system of law rather than the adversarial system which we operate.” Comment In recent times the number of cases being defended on the basis of alleged ‘unfair terms’ in response to claims made by a bank seeking possession of a secured property or for summary judgment has significantly increased. This judgment will be extremely helpful to practitioners acting for the creditors in these types of proceedings. In the instant case Meehan J. noted that the plaintiff and Miriam O’Donohoe were represented by solicitor and counsel which goes a “considerable distance to removing the imbalance”. It will be interesting to see if the Court will take the same approach in circumstances where a defendant is not legally represented. In an article published in the Commercial Law Practitioner [6] on the topic of unfair terms in consumer loan contracts, Eoin Martin states that “mortgagors are almost always represented by solicitors when executing mortgage deeds…..All borrowers understand that the fundamental essence of mortgage agreements is that if scheduled loan repayments are missed, the secured asset may be repossessed…..The sad reality is that the overwhelming majority of repossession cases turn simply on that fundamental principle. In the absence of reliance on unusual or unconventional terms, the potential impact of the UTCC Directive is largely academic.” To date it appears that the Court is taking the same pragmatic view as that of Eoin Martin set out above. Footnotes: [1] [2016/612S] [2] C-415/11, judgment dated 14 March 2013 [3] [2017] IEHC 803 [4] Circuit Court, 9 August 2017 [5] [2016] IEHC 75 [6] 2017, 24 (4) 71-29