Crystal Clear? The Transparency Requirement in Unfair Terms Legislation

2.1 Function and Criterion

It follows from Article 5, first sentence, UCTD that Terms and Conditions (T&Cs) used in a consumer contract must be drafted in plain and understandable language. The function of this transparency requirement is to enable the average consumer to assess their legal position at the time of concluding the contract^[2] (and again at a later date if she so desires).^[3] This is because the other party must be able to foresee at the time of concluding the contract, on the basis of clear and comprehensible criteria, which economic consequences result from the term.^[4] In doing so, according to the Court of Justice (CJEU), it is up to the trader to prove that the term was drafted in plain and intelligible language.^[5] Gardiner notes in this regard that the transparency requirement should make it easier for consumers to make informed decisions and enforce their rights.^[6] Van Boom adds that it should enable consumers to compare different offers.^[7]

In assessing whether the transparency requirement is met, the CJEU held that the standard of the ‘average’ consumer, defined as a consumer ‘who is reasonably well informed and reasonably observant and circumspect’, is to be applied.^[8] Decisive is whether such a consumer, after having read all relevant factual284 information, including the advertising and information provided by the trader, should have understood what economic consequences would result from the term.^[9] The yardstick therefore contains an objective and normative concept. Objective, because it assumes the average consumer against whom the clause is invoked.^[10] Normative, because the consumer is deemed to have taken cognizance of the relevant factual data, such as the information provided by the trader, even if it was clear to the trader at the time the contract was concluded that the consumer in fact had not read the information. Because of the objective nature of the test, it seems to me that any factual knowledge of this specific consumer (either from their own knowledge or on the basis of assistance provided to them) is in principle irrelevant for assessing whether the term is in plain and intelligible language, precisely because it was drafted in advance and the consumer was not able to influence its wording. However, this interpretation is not entirely certain. In OTP Bank/Ilyés and Kiss,^[11] the CJEU held that when applying the test, the court should ‘take into account all of the circumstances of the case in the main proceedings as they existed at the time when the contract was concluded’ (italics by me). This suggests that circumstances concerning the individual consumer concerned, such as a certain level of education or the possible presence of expert assistance, may also be taken into account when assessing whether the term was drafted in plain and intelligible language. Moreover, the judgment does not make it clear whether the trader (at the time the contract was concluded) must also have been aware of those circumstances concerning the consumer himself. In my opinion, however, it would seem obvious to require this, because only in such case could the trader provide additional information or an explanation of the term if so required. Yet, with this consideration the Court of Justice seems to have partly abandoned an all too objective standard and to leave some room for a judgment that is more tailored to the person of the consumer (or to the group of persons to which the consumer belongs).285

2.2 Linguistic and Grammatical Intelligibility

For the consumer to be able to compare offers and to make informed decisions, it is first and foremost required that a term be comprehensible linguistically and grammatically. This is by no means self-evident. Van Boom ^[12] discusses the following term in the description of the coverage of (admittedly) an old funeral insurance policy of an insurance company:

The insured are entitled to a Funeral Service with a hearse – two 1st class following cars – (…) – condolence register – grave rights + coffee table up to a maximum amount of forty guilders.

After the death of the consumer’s mother, a conflict arose over the interpretation of the term describing the insurance coverage. The conflict revolved around the legal question of whether the limitation of compensation to 40 guilders refers to the coffee table, or to the coffee table plus the cost of the grave itself. According to the ADR body dealing with the case, this term is clear and can only be read in one way:

As Insurer correctly argues, the insured services are enumerated by use of the “−” sign. The grave rights and coffee table are listed as one entity or service. This becomes all the more clear because the “+” sign has been used. The coffee table and grave rights together are subject to a maximum fee of 40 guilders.^[13]

Linguistically and grammatically – and following the time-honoured mnemonic BODMAS (Brackets, Order, Division/Multiplication, Addition/Subtraction) – frankly, I would have come to the opposite outcome. But at the very least, the conclusion here must be that the wording used, including the ‘+’ and ‘−’ sign, are ambiguous. This view is strengthened by the fact that these days, grave fees in The Netherlands cost an average of € 175 to € 185 per year and often must be paid at once for a period of 20 or 30 years.^[14] Assuming the cheapest option (20 years at € 175), this amounts to € 3500. If286 it is assumed that this insurance was taken out in 1970 or 1980,^[15] this corresponds to 1362.60 and 2710.36 guilders, respectively.^[16] That makes a maximum of 40 guilders for the reimbursement for coffee table and grave rights together almost equivalent to an exclusion of the reimbursement of these costs even as long ago as in 1970 or 1980. This seems to me to contradict the prominent mention of the term ‘grave rights’ in the provision describing the insurance coverage: these costs are obviously higher than renting following cars for a couple of hours, so for that reason the average consumer may assume that the grave rights are also substantive covered.

2.3 Economic Transparency

But even if a text is linguistically and grammatically comprehensible, this does not mean that a consumer has understood it. A simple test conducted by Van Boom among 150 highly educated people speaks volumes in this regard:^[17] of these people – educated higher than the average Dutch person –, two-thirds did not understand a simple legal text. Therefore, mere linguistic and grammatical intelligibility is not sufficient, according to established CJEU case law.^[18] Instead, the CJEU has consistently held that the transparency requirement is not met if the average consumer^[19] does not have, before or at the time of conclusion of the contract, all the information necessary to reach an informed decision on the desirability of concluding the contract on the terms offered by the trader.^[20] Which information is needed should be based on the information available to the trader at the time the contract was concluded.^[21] This implies287 that, in the case of a long term contract, the trader cannot be expected to predict precisely how the economic burden that may be associated with an indexation mechanism included in the contract will evolve: such a degree of precision is obviously impossible. However, according to the CJEU, the trader may be expected to state the criteria used by it in calculating a price change so that the other party is able to calculate and assess the price change itself.^[22] In this context, Van Boom rightly warns that it follows that a term should not leave the trader too much discretion in the exercise of his powers.^[23] In the case of a mortgage loan with a variable interest rate, this means that the trader must provide information on the development of the index on the basis of which the interest rate is determined, since the fluctuations in the index allow the other party to understand the extent of the risk assumed by it.^[24] If a term involves a particular risk for a consumer, the consumer should be expressly warned of that risk.^[25] The focus on the moment of contract conclusion means that later provision of this information cannot bring about that a term is judged as sufficiently transparent after all, even if in reality most consumers will start reading T&Cs at most at the moment when something does not go as they had expected or wished.^[26]

However, when assessing the economic transparency^[27] of the term, the advertising carried out by or on behalf of the trader and the information provided during the formation of the contract by the trader or any other person who participated in the formation of the contract with the consumer on behalf of the trader should be taken into account.^[28] These circumstances are the trader’s responsibility (who, in this regard, could have changed the T&Cs used before the conclusion of the contract) and may also lead to justified expectations on the part of the consumer.288

The CJEU ruled that a mere reference to a statutory provision by a trader is in any case not sufficient to satisfy a legal duty to provide information.^[29] It can be inferred that such a reference in T&Cs does not meet the transparency requirement: for the average consumer, references to legal provisions will be incomprehensible. And the Court is of course right: even if it could be argued that the average consumer can be expected to understand a legal text, they can in any case not be expected to look up the text of these legal provisions themselves to see what rights and obligations arise for them from the contract. To give an example, I found the following provision in a health statement for a life insurance policy:^[30]

The undersigned declare that the answers and information provided by or on behalf of them when applying for this insurance are complete and in accordance with the truth. They are aware that if, after the conclusion of the insurance, it appears that one or more questions have been answered incorrectly or incompletely, the insurer may invoke the consequences which the Civil Code, in particular Articles 928–930 and 982–983 of Book 7, attaches to this, such as the cancellation of the insurance, the refusal of the payment or the limitation of the amount of the payment.

The average consumer who has read this text will probably understand that concealing the truth or inaccurate answering the questions may have dire consequences, but this term does not indicate to the average consumer when this is the case and what sanction may be imposed in which case.

The CJEU also considers that a term stating that a contract is governed, for example, by Luxembourg law does not satisfy the transparency requirement if it misleads the average consumer by giving them the impression that only Luxembourg law applies to the contract, whereas in reality the consumer can rely on the protection offered by the mandatory law of their own Member State.^[31] The Court seems to suggest that if the choice of law clause does contain a reference to those mandatory rules, it would not be unfair. In my opinion, however, a mere reference to these mandatory rules will not result in the average consumer knowing which rights and obligations derive from the contract either. After all, the consumer cannot be expected to look up the text of that mandatory law to see what rights they can derive289 from that mandatory law. At most, the average consumer will infer from such a reference that sometimes rules apply other than those of the legal system mentioned in the term.

The transparency requirement imposes strict requirements on terms which determine the amount of the price payable to the trader or which allow for modification of that price. This is, of course, quite understandable from the function performed by the transparency requirement. If consumers are to be able to make informed decisions about contracting and be able to compare different offers, they must be able to calculate and predict the price, both at the time of contracting and at the time when that price would be changed. This requirement is not met if the price is based on a variable that the consumer cannot estimate. For example, the CJEU ruled that a term in a contract with a lawyer indicating only the lawyer’s hourly rate, without giving any further indication of the total amount charged to the consumer, does not satisfy the transparency requirement. According to the Court, the lawyer may be expected to provide an estimate of the foreseeable or minimum number of hours to perform a particular service, or that the lawyer would be contractually required to provide interim invoices or reports at reasonable intervals indicating the number of hours of work already performed.^[32]

The Court ruled in a similar vein in the case of a foreign currency credit agreement. In such an agreement, it should at least be clear to the consumer what the effect is of a sharp depreciation of the currency in which they receive their income compared to the currency in which the periodic payments for the repayment of the loan and for interest are to be made and that, as a result of that exchange rate risk, the loan could potentially become economically burdensome for them.^[33] To this end, the creditor will have to transparently explain the mechanism for calculating the loan, expressed in the foreign currency, and the applicable exchange rate, so that the average consumer can estimate the total cost of the loan^[34] and is able to determine the current exchange rate at any time.^[35] This requirement may be fulfilled if the consumer would have received, at the time of the conclusion of the contract, a form containing additional information on the exchange rate risk, containing concrete examples of the calculation of the risk in case of a depreciation of the own national currency compared to the currency used290 in the credit agreement.^[36] However, in the case of a credit agreement that does not specify the annual percentage rate of charge, but only includes the mathematical equation by which this rate of charge can be calculated, the transparency requirement is not met.^[37]

2.4 Formal Transparency

The Unfair Contract Terms Directive does not seem to contain any rules on the provision of T&Cs to consumers. As such, the foregoing dealt with substantive transparency: the requirement that terms in T&Cs be in plain and intelligible language is made in light of the possibility of the consumer obtaining information in order for them to be able to give informed consent regarding the content of the contract.^[38] However, the CJEU already ruled in 2013 that it follows from the transparency requirement not only that the trader must draft its T&Cs in clear and comprehensible language, but – in connection with recital (20) in the preamble – also that ‘the consumer must actually be given an opportunity to examine all the terms of the contract’ because it is ‘of fundamental importance for a consumer’ that they receive ‘(i)nformation, before concluding a contract, on the terms of the contract and the consequences of concluding it’. According to the Court, ‘(i)t is on the basis of that information in particular that he decides whether he wishes to be bound by the terms previously drawn up by the seller or supplier.’^[39] In this respect, the Court points at transparency in the formal sense: formal transparency. Formal transparency is not so much about the content of the T&Cs, but about actually giving the consumer the opportunity to become acquainted with them and to decide on whether to conclude the contract after having read them.^[40]

However, formal transparency goes beyond merely actually providing general terms and conditions. The possibility of being able to take note of the contents of the T&Cs before concluding a contract implies that these should also be accessible to the consumer. This requirement is not fulfilled if the T&Cs provided are illegible because291 the stored information is not accessible (the paper copy of the T&Cs is damaged or otherwise illegible, or the stored electronic file contains bugs or errors and therefore cannot be opened). The unreadability can also be caused by the fact that the T&Cs are printed in Gothic letters, the terms are presented in a colour that is difficult to distinguish from the background, or are printed or depicted in such a small font size that they are no longer readable for the average consumer (or, if the trader addresses a specific target group, e.g. pensioners: the average member of that group) without a magnifying glass.^[41] Also the overall structure of the T&Cs, in particular in the case of stacking sets of T&Cs by means of cross-references and hyperlinks or regulating related topics in very different places in the T&Cs may imply that the average consumer is no longer able to assess the entirety of the rights and obligations. In this regard, reference can be made to digital services, such as social media services, where it is quite common for the various digital services to have separate Terms of Use, in addition to a general set of T&Cs for all services provided by the service provider and one or more privacy policies.^[42] In all these cases, the transparency requirement contained in Article 5 UCTD has been violated.

3.1 Contra Proferentem Rule or Unfairness Testing?

The Unfair Contract Terms Directive does not explicitly prescribe which consequences are attached to the fact that a term does not comply with the transparency requirement.^[43] A prima facie obvious consequence is the application of the contra proferentem rule, which after all is included in the same Article of the Directive. Application of the contra proferentem rule means that when a term can be interpreted in two plausible ways, it will be interpreted against the trader. This approach appears to be favourable to the consumer, but it is not always so. Indeed, a term may not be unreasonably onerous292 if interpreted in favour of the consumer, and thus it survives the content test, whereas it would be considered unfair if interpreted in favour of the trader.

Consider, for example, the following term in a Dutch disability insurance policy regarding the determination of the insured’s benefit:

As long as the insured is incapacitated for work, the degree of incapacity for work, the amount of the benefit and the period for which it will apply will be determined by the company based on information from medical and other experts to be appointed by the company. The policyholder will be notified of this determination as soon as possible after receiving it. If the policyholder has not notified his objection within 30 days, he shall be deemed to accept the company’s position.^[44]

According to the insurance company, this term did not bring about the unilateral determination of its obligations under the contract, and the objection period included in the last sentence of the term was not an expiration period. In its view, this meant that if the objection period had expired, it was up to the consumer to prove that the insurance company’s position on the degree of incapacity for work was incorrect. However, the consumer argued that the term contained an expiration period and that once it had expired, they were deemed to have agreed to the benefit determination as established by the insurance company.^[45]

Application of the contra proferentem rule here meant that the insurance company’s position had to be followed – after all, in that interpretation the term contained (at most) a rule of evidence, whereas in the consumer’s reading it would concern the forfeiture of the right to oppose the degree of incapacity for work determined by the insurance company, and the extent of the benefit and the duration of the period to which the determination would apply. The Hoge Raad, the Dutch Supreme Court, indeed applied the contra proferentem rule and then noted that the term did not prevent the consumer from submitting the insurance company’s position to a grievance committee or a court for review, even if the consumer did not respect the objection period specified in the term. The Court held that ‘(t)hus interpreted, the objection period does not have a separate meaning.’^[46] Subsequently,293 the Supreme Court ruled that the term was not unfair, even though the term (still) resulted in a slight deterioration of the consumer’s position on a number of points.^[47]

Application of the contra proferentem rule therefore resulted in the term being upheld. However, if the Dutch Supreme Court had followed the consumer’s reading, the term would be presumed to be unfair under Article 6:237 under g BW (Burgerlijk Wetboek, i.e. the Dutch Civil Code) as it provides for the forfeiture of the consumer’s rights as a sanction for not respecting the requirement to launch their objection within 30 days. As a consequence, unless the trader would submit evidence that the term in fact was fair, a court would have to hold the term to be unfair and thus to invalidate it. This demonstrates that the order in which the two instruments are to be applied – assessing the term for unfairness or applying the contra proferentem rule – may lead to different results.

From the case-law of the Court of Justice it follows that the transparency requirement is to be seen above all in the light of the assessment of whether a term is unfair: in Verein für Konsumenteninformation v Amazon EU, the CJEU held that ‘the unfairness of such a term may result from a formulation that does not comply with the requirement of being drafted in plain and intelligible language set out in Article 5 of Directive 93/13.’^[48] In VB and others v BP Paribas and others, the Court made it clear that ‘the transparency nature of a contractual term, as required under Article 5 of Directive 93/13, is one of the elements to be taken into account in the assessment of whether that term is unfair’ by the national court.^[49]

The CJEU’s case-law clearly goes in the direction, which is advocated by the Bundesgerichtshof, the German Supreme Court. In that approach, at first the term must be interpreted in the least customer-friendly way possible (‘kundenfeindlichsten Auslegung’). This means interpreting the term in favour of the trader. The term thus interpreted is assessed against the open standard of the unfairness test and may then be held to be unfair. If it is not, and the term therefore ‘survives’ the unfairness test, it is valid. At that point, however, the contra proferentem rule would be applied.^[50] Waelkens argues, in my view correctly, that this is also the correct294 application of the contra proferentem rule under the Unfair Contract Terms Directive.^[51] In the case reviewed by the Dutch Supreme Court, this would mean that it would first be assessed whether the term contained an unreasonably onerous sunset clause. Only if the trader had succeeded in proving that the term was not unfair would it pass the unfairness test. And only in that case, the contra proferentem rule would be applied.

Moreover, the contra proferentem rule can only be applied in cases where the ambiguity consists in the fact that a term can be interpreted in two plausible ways. This possibility does not exist when the ambiguity does not relate to the interpretation of the term, but to other circumstances. For example, the contra proferentem rule cannot be applied to remove the ambiguity about the total amount of costs that a consumer will have to pay for the work of the lawyer who only mentioned their hourly rate. And the ambiguity about the operation of the exchange rate risk in the case of a credit agreement in foreign currency is not removed by interpreting the term in a consumer-friendly way. In such cases, the lack of transparency concerns the content of the term resulting in the consumer not being (or having been) able to make an informed decision as to the conclusion of the contract.

The approach defended above – first assessing the unfairness of the term, only then (possibly) applying the contra proferentem rule – does mean that there seems to be little room left for the contra proferentem rule: if the consumer cannot oversee the economic consequences of a term that can reasonably be susceptible to more than one interpretation, by definition that term will considered lacking transparency and thus likely to be found unfair.

3.2 Unfairness?

From the above, it follows that the mere fact that a term is not transparent does not automatically mean that it is unfair. Whether this is the case must be determined based on an overall assessment of the term, which also takes into account other factors, such as the other terms included in the contract and the extent to which the295 term deviates to the detriment of the consumer from the otherwise statutory provisions.^[52]

An example of a case where the trader succeeded in proving that the intransparant term was nevertheless fair is offered by a judgment of the Court of Appeal Arnhem-Leeuwarden.^[53] That case concerned a term under which the consumer was entitled to transfer a mortgage loan in order to benefit from a decrease in interest rates, but which obliged them in such case to pay an interest retention fee to the bank. According to the Court of Appeal, the average consumer could not understand how the interest retention fee would be calculated. However, the court considered that the bank was entitled to rely on the fact that the consumer would have agreed to the term if it had been negotiated in a fair and equitable manner, because the term gave the consumer the right (and not the obligation) to benefit from an interest rate decrease despite the fixed-interest period. The lack of transparency therefore did not carry sufficient weight, according to the court, to consider the term unfair. In cassation, the Dutch Supreme Court confirmed this view.^[54] In this case, therefore, the positive effects the term would (also) have for the consumer were clearly demonstrable.

There is therefore no automatic link between the breach of the transparency requirement and the judgment that the term is unfair. However, in my opinion, the starting point should be that an intransparant term is in fact regarded as unfair, unless the opposite is demonstrated by the trader.^[55] After all, in such cases it concerns a term that (even) the ‘average consumer’ – as understood by the Court of Justice – could not easily understand and of which they could therefore not properly assess the economic consequences. Therefore, in the case of an intransparant term, the consumer’s interest in informed consent is compromised. In my opinion, this implies that an intransparant term can only be considered fair in exceptional cases, where the possible positive effects of the term should be easily demonstrable by the trader.

The Unfair Contract Terms Directive only contains minimum harmonisation.^[56] On that basis, the Court recently held that the Directive does not preclude a rule of national law that the lack of transparency of a term in a consumer contract automatically leads to a finding that it is unfair.^[57] This means that in such case the unfairness test itself is not applied. However, as such a rule of national law296 automatically qualifies the intransparant term as being unfair, all consequences that the Court of Justice has attached to the unfairness of the term apply.

The sanction attached to the unfairness of a term is far-reaching. According to established case-law of the Court of Justice, the national court may not in any way give effect to the unfair term nor replace it by the otherwise applicable default law, unless the invalidity of the term would lead to the invalidity of the contract as a whole.^[58] This consequences may be so severe that a court could be reluctant to hold a term unfair.

3.3 The Special Case of Formal Transparency

In the case where there is a lack of formal transparency, a different approach could be argued for. Already in its RWE Vertrieb judgment,^[59] the Court of Justice pointed to recital (20) of the preamble to the Unfair Contract Terms Directive, requiring traders to provide the consumer with an actual opportunity to examine all the terms before the conclusion of the contract, which the Court considered of fundamental importance. As the Unfair Contract Terms Directive does not provide for a specific rule regarding formal transparency, the Court could only take this into account as a matter of unfair terms legislation. However, one could argue, the fact that this recital precedes a recital on unfair terms,^[60] and that the Directive only explicitly attaches consequences to the use of such terms^[61] could be understood as signalling that Member States are free to establish or maintain alternative approaches preventing terms that lack formal transparency from binding consumers. Only where such alternative approaches are missing or ineffective, the Directive steps in those cases where the term’s lack of transparency leads it to it being unfair. Such an approach would seem to be in line with the minimum harmonisation nature of the UCTD.

If this argument would be accepted, this would have important consequences. Where national law prevents intransparant terms from having effect, the unfairness test is not applied. Therefore, also the consequences of unfairness as developed under the case-law of the Court of Justice do not apply. This means that in case of a lack of formal transparency – the terms were not provided to the consumer before the conclusion of the contract or were illegible or not accessible to the consumer – the national court could resort to the application of the otherwise applicable default297 rules. This would mean that the breach of formal transparency has a lesser impact on the position of the parties than a breach of substantive transparency would have.

There are good reasons to make such a distinction. Where in the case of an unfair term, the trader has tried to incorporate a provision that disturbs the contractual balance between the rights and obligations of the parties, this need not be the case here. Instead, in the case of a lack of formal transparency, the consumer could not take the T&Cs into account when deciding whether to contract. The consumer thus must have made their decision to contract based on the core terms – the price and the description of the goods or services offered by the trader – and their knowledge of the law that (apart from the T&Cs) would have been applicable to that contract. Rendering the T&Cs ineffective but allowing the parties to rely on the otherwise applicable law therefore seems to honour the consumer’s reasonable expectations of the contract and the economic consequences deriving from the contract, as well as the justified interests of the trader. In fact, the consumer is put in precisely the same position as they would have been if the trader had not attempted to incorporate the T&Cs in the contract in the first place.

There are several ways in which such sanction could be introduced. Let me just mention three approaches that have, in fact, been adopted in Member States. Various national codifications simply provide that where the consumer, at the time of the conclusion of the contract, was not provided with the opportunity to take note of the T&Cs, these shall not be part of the contract.^[62] A slightly more complicated (or sophisticated, if you will) approach is taken under Dutch law. According to Articles 3:33, 35 and 232 BW, T&Cs are incorporated into the contract if the consumer was aware of their existence and did not actively protest their incorporation. However, where the T&Cs were not provided to the consumer before or at the time of the conclusion of the contract, under Articles 6:233 under b and 234 BW the consumer may avoid all of the T&Cs, or any term thereof, giving the consumer the possibility to invalidate only terms that are detrimental to them, but have terms applied that are actually to their advantage. At least in theory these approaches are also available when the T&Cs have been provided but are illegible or inaccessible.^[63] This is certainly the case under Estonian law, where such rule applies both for breaches of substantive and formal transparency.^[64] 298