Legal column by Clément Vandevooghel, member of the Paris Bar, Counsel at Gide Loyrette Nouel A.A.R.P.I and Agathe Llorens, member of the Paris Bar, associate at Gide Loyrette Nouel A.A.R.P.I

In litigation concerning non-performing debts arising from real estate loans, it is not uncommon for debtors to argue that clauses for acceleration are unfair. In two rulings handed down on March 22, 2023, the First Civil Chamber of the French Supreme Court (Cour de cassation) provided an interpretation of the unfairness of such clauses.

Characterization of an unfair term

Article L. 132-1 of the French Consumer Code (now article L. 212-1 of the Code de la consommation) lies at the heart of these two disputes. According to this text, in contracts concluded between professionals and consumers, clauses are unfair if their purpose or effect is to create, to the detriment of the consumer, a significant imbalance between the rights and obligations of the parties to the contract.

The facts of these two cases are very similar. In the first case (appeal no. 21-16.476), a bank granted a residential property loan to an individual, including a clause authorizing the bank to demand in advance all sums due under the loan in the event of non-payment of a monthly instalment, without prior formal notice or notice. Following the borrower's default on payment, the bank issued a summons for compulsory sale, and the real estate enforcement court ordered the sale of the secured properties.

In the second case (appeal no. 21-16.044), a bank granted a property loan to a couple of borrowers, whose loan contract included a forfeiture clause that could be invoked eight days after an unsuccessful formal notice had been sent to the borrowers in the event of non-payment. After noting the default in payment, sending a formal notice and declaring the loan in arrears, the bank initiated enforcement proceedings against the properties belonging to the borrowers.

In both cases, the borrowers argued that the acceleration clause was unfair.

The Cour de cassation ruled that these forfeiture clauses were unfair on the grounds that ". lhe clause providing for automatic termination of the loan contract after a formal notice to pay has been served on the borrower.ler one or more unpaid instalments without reasonable notice, creates a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer, who is thus exposed to a sudden worsening of repayment conditions. ".

The Cour de cassation (French Supreme Court) points out that the assessment of whether a clause is unfair does not concern the definition of the main object of the contract, or whether the price corresponds to the goods sold, or the remuneration to the service offered, provided that the clause is drafted in a clear and comprehensible manner.

As a basis for its rulings and for educational purposes, the Cour de cassation also recalls the position of the Court of Justice of the European Union (CJEU), as set out in the " Banco Primus "January 26, 2017[1]interpreting Directive 93/13/EEC on unfair terms[2] which establishes four criteria for assessing the unfairness of a clause concerning the forfeiture of the term due to the debtor's failure to meet his obligations. These four criteria are :

1. whether the obligation not performed by the consumer is essential;
2. the seriousness of the default in relation to the duration and amount of the loan;
3. whether or not it derogates from the ordinary law applicable without such a clause; and
4. the provision by national law of adequate and effective means for the consumer to remedy the effects of this exigibility.

These criteria were the subject of a preliminary question submitted by the First Civil Chamber of the French Supreme Court (Cour de cassation) in 2021.[3]which questioned whether they were cumulative or alternative. In its 2023 rulings, the Cour de cassation therefore refers to the answer given by the CJEU in its ruling of December 8, 2022.[4] which states that the four criteria are neither alternative nor cumulative, and that they must be taken into account". as forming part of the totality of the circumstances surrounding the conclusion of the contract concerned, which the national court had to examine in order to assess the unfairness of a contractual term ". This response from the CJEU thus makes these criteria a set of clues for determining whether or not an acceleration clause is unfair. This also means that the judge must check all these criteria and determine whether in concreto the unfair nature of the clause.

In recalling these elements, the Cour de cassation underlines the importance for judges to take into account the overall context of the conclusion of the contract and all the circumstances surrounding the parties, to ensure that consumers are not placed in a disadvantageous position.

Protection increased from consumers

The decisions of March 22, 2023 reflect the current trend towards greater consumer protection, illustrated in particular by the obligation for judges of the court of first instance to verify the unfairness of the clauses in question.

In the first case, the Cour de cassation criticized the Court of Appeal for failing to examine ex officio whether the forfeiture of term clause was unfair. This approach to unfair terms is not surprising, given that it had already been adopted by the Cour de cassation in a decision dated February 8, 2023.[5]taking up the CJEU's solution that ". national courts are obliged to examine of their own motion whether the stipulations agreed between the parties are unfair in nature "[6].

In the second case, on the other hand, the Court of Appeal did analyze the acceleration clause, but did not consider it to be abusive, finding that "... the term of the contract shall not be deemed to have expired. the forfeiture of the term has been pronounced after a misThe clause also provided for the penalty of non-compliance with the main obligation of the loan contract, in accordance with the resolutory clause mechanism. ". However, the Cour de cassation ruled that the acceleration clause lacked a reasonable notice period - in this case eight days - thus creating a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer.

Credit institutions will therefore need to be even more vigilant when drafting their credit agreements to take these factors into account. Investors purchasing non-performing loans within the meaning of Directive (EU) 2021/2167 of November 24, 2021 are also likely to take a close look at how this risk is allocated.[7]which was recently transposed into French law by Ordinance no. 2023-1139 of December 6, 2023.

[1] CJEU Jan. 26, 2017, aff. C-421/14, D. 2018. 583.

[2] Council Directive 93/13/EEC of April 5, 1993 on unfair terms in consumer contracts.

[3] Civ. 1re, June 16, 2021, no. 20-12.154.

[4] CJEU Dec. 8, 2022, aff. C-600/21, D. 2022. 2220.

[5] Com. Feb. 8, 2023, no. 21-17.763 , D. 2023. 293.

[6] CJEU June 4, 2020, Case C-495/19, Kancelaria Medius, D. 2020. 1228.

[7] Directive (EU) 2021/2167 of the European Parliament and of the Council of November 24, 2021 on credit managers and credit purchasers, and amending Directives 2008/48/EC and 2014/17/EU.