One of the most critical issues captivating banks and their retail borrowers in recent years in Poland has been the future of foreign currency loans, especially those denominated in or indexed to Swiss francs. After the political battle around such loans has settled, the issue is now mainly addressed in court proceedings between borrowers and creditors. A long-awaited judgment was issued by the European Court of Justice on 3 October 2019 and has already been followed by judgments of local Polish courts. Putting aside myths and hopes, we look closer at what may be the actual consequences of the ECJ ruling for all interested parties: borrowers and both primary and secondary creditors.
What’s it all about?
After Poland joined the EU in 2004, many Poles enticed by low interest rates took out mortgage loans linked to foreign currencies, including the now notorious Swiss franc. Following the financial crisis in 2008–2009, its repercussions and the decision of the Swiss central bank to abandon its currency cap in 2015, the rate of the Swiss franc against Polish zloty surged. Trapped with facility agreements containing indexation or denomination clauses, borrowers started to sue banks over allegedly unfair terms of foreign currency linking mechanisms, claiming that they included abusive terms and consequently could not be effective against consumers. Usually borrowers in such cases claim that the loan granted to them was actually a Polish zloty loan, and the linkage to a foreign currency should be removed either by nullifying the entire agreement or by striking the denomination or indexation mechanism. The main goal is to avoid an increase in indebtedness resulting from the surge of FX rates, and to repay the Polish zloty amount that was actually disbursed to them.
In one such case, the matter was raised with the European Court of Justice. Hearing the case of the Dziubaks, Polish borrowers challenging the allegedly unfair practices of a Polish bank, the Warsaw District Court submitted a request to the ECJ for a preliminary ruling on the issue. Many borrowers expected that the judgment in the case would bring a breakthrough and establish guidelines for adjudication favourable to borrowers.
What did the ECJ really say?
First and foremost, the ECJ ruling does not directly answer the question of the consequences of foreign currency loans issued in Poland. The ruling was delivered to guide the courts on whether EU law sets any boundaries for remedies the Polish courts could apply in cases where they find that specific clauses in loan agreements are abusive towards customers who have taken out loans. These guidelines, although issued in a case where an indexation clause was disputed, could also apply to other situations where a clause is found to be abusive against a consumer who entered into a loan agreement that included a denomination mechanism.
Secondly, the grounds for finding an indexation (or other) clause abusive are not discussed in the ECJ ruling. It provides instead that each case should be examined individually and that it is within the competence of national courts to determine whether, in the circumstances of a given case, the terms of the loan may be regarded as abusive. If so, the consequences of such clause being abusive are generally subject to the local law of each member state.
Finally, the ECJ held that if the local court finds a clause abusive, it may apply remedies available under local law, bearing in mind that EU law does not preclude the courts from ruling that an agreement that includes an abusive indexation clause:
- Is entirely invalid, if such consequences are provided for in local law and the agreement cannot continue without such clauses due to a change of the main subject matter of the contract, or
- Is valid, but with the abusive provisions stricken, if such consequences are provided for in local law and the agreement can continue without such clauses.
At the same time, the decision on whether the agreement without abusive clauses could continue to bind the parties belongs to the local court and depends on the provisions of local law. Significantly, the ECJ cited its previous rulings which found that contractual provisions related to FX risk may be treated as related to the main subject matter of the contract, and thus may be subject to different scrutiny in terms of their abusive nature.
A discussion of the possibility of upholding the validity of the loan agreement may be particularly relevant in cases where borrowers seek to reclassify the loan agreement as denominated in Polish zlotys but at the same time subject to an interest rate calculated based on LIBOR. Considering the most recent judgments of Polish courts, which seem to allow for such reclassification, issued after the ECJ ruling was announced, it remains to be seen which direction will be followed by most Polish courts.
Furthermore, the ECJ ruling held that national courts may supplement loan agreements with dispositive provisions of law or other provisions which the parties agreed to apply in lieu of abusive clauses but are precluded by EU law from supplementing loan agreements with customary arrangements or general provisions of law. Nevertheless, such supplementation of loan agreements remains subject to other conditions and is not an automatic mechanism to be implemented by the court.
- Potential implications for borrowers
The ECJ ruling does not provide borrowers with a clear answer on whether they can successfully pursue their claims. The one thing they can be sure of is that each case will be analysed independently, within the limits indicated in the ECJ ruling. From the perspective of borrowers, although the ECJ ruling concerns CHF-indexed mortgage loans, it seems that the interpretive guidelines presented may also be applied to loans denominated in a foreign currency, so long as the given clause has already been found abusive. But in any case, the burden of proof on the abusiveness of the clause lies with the borrower.
- Consequences for banks
The ECJ ruling is not a source of any consequences affecting the banks or the banking system automatically and, to boot, on a mass scale. Although it may be expected that more and more borrowers may challenge their loan agreements, the process will take some time and the results will largely depend on judgments issued by Polish courts.
Importantly, the ECJ ruling does not completely rule out any possibility, meaning that where denomination or indexation clauses are found abusive, there may still be cases where the loan agreements are entirely invalidated as well as cases where the agreements are reclassified as loans granted in Polish zloty but with the interest rate based on LIBOR.
Each such case will require the bank and the borrower to recalculate their obligations. It has been quite clear what claims may be raised by borrowers, but it remains an open issue if the banks will be entitled to a fee for advancing capital for a long period when the loan agreement is declared invalid at some point. Moreover, it must be remembered that the existence of the loan agreement is vital for many types of security interests, including mortgages securing repayment of loans.
Different consequences may apply to banks that decided to securitise their portfolio.
- Implications for secondary creditors
Portfolios of FX mortgage loans are not only held by banks, but may have been acquired by secondary market participants as part of the securitisation process, as either performing or non-performing loans. Effective challenge of the underlying loan agreement will always have consequences for investors, as it will affect either the balance or existence of the loans in the portfolio as well as the possibility of enforcing claims against collateral.
As a result, banks and securitisation funds may have to scrutinise their receivable purchase agreement in light of the parties’ liability and put-back provisions. In certain cases, mutual settlements may be required.
The ECJ ruling is not binding on Polish courts, but it determines the direction that the Polish courts may follow. The decision on which of the two possibilities should be used in the specific case (annulling the entire loan agreement that includes abusive clauses, or striking only the indexation or denomination clause and leaving the interest calculation mechanism), or if there would be a third option, belongs to each court ruling in a specific case. Both concepts are present in the case law in similar matters in Poland. There used to be a third option, where the courts tried to supplement the loan agreement with other provisions, but following the ECJ ruling it seems that option will have a limited impact.
At the time of publishing this article there have been at least two judgments of Polish courts issued after the ECJ ruling reported by the media, one issued by the court of first instance and the other by the court of appeal. Both judgments suggested that a loan agreement containing abusive clauses does not always have to invalidated, but may survive without the abusive indexation clauses, although with the initially agreed interest rate calculation mechanism based on LIBOR (but in the second case this has not been definitely decided). More details should be available after the written reasoning for those judgments is made public.
Summing up, the ECJ ruling did bring certain answers, but a number of issues remain open to be addressed by Polish courts, depending on the evidence and arguments presented by the borrowers and creditors. Until there is stable and clear case law supported by the Supreme Court of Poland, it will be difficult to make general and definitive predictions on the direction that may be followed by the courts, and thus the degree of risk related to portfolios held by banks or securitisation funds. Nevertheless, the ECJ ruling reminds all market participants, whether debtor or creditors, that the issue of mortgage loan agreements linked to foreign currencies should not be left unattended.
Daniel Smarduch, adwokat, Łukasz Szegda, attorney-at-law, Sylwia Boguska, Banking & Project Finance practice, Wardyński & Partners