Mgr. Oliver Uraz: What to do with invalid consumer loans or how to make the most of the minimum

ARROWS also specialises in consumer credit. In a recent article our colleague Mgr. Oliver Uraz addressed the issue of assessing a consumer's ability to repay a loan before entering into a loan agreement and outlined the conditions that a careful lender should fulfil in order to be sure that its loan agreement will not be found invalid in light of current legislation and case law.

This article was written in 2019. If you are looking for up-to-date information on this topic, please do not hesitate to contact us at office@arws.cz or by phone on +420 245 007 740. We will be happy to advise you.

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Author of the article: ARROWS (Mgr. Oliver Uraz, LL.M., office@arws.cz, +420 245 007 740)

This will certainly avoid many disputes in the future before the courts or the financial arbitrator about the validity of loan agreements concluded in this way. However, the question remains as to what to do with contracts that are already 'in the running' and for which the creditworthiness assessment has not been carried out to this standard, whatever the reason.

The potential problem is also exacerbated by a recent Supreme Court decision in which the Supreme Court concluded that the invalidity of a consumer credit agreement on the grounds of a lack of an assessment of the consumer's ability to repay the credit before it is granted should be examined by the courts even in the case of credit agreements concluded before 25 February 2013. The courts should therefore examine the creditworthiness assessment even in the case of agreements concluded before the effective date of the amendment which expressly introduced the sanction of invalidity of such an agreement into the then applicable Consumer Credit Act.

Unjust enrichment

It is a relatively well-known fact that if the performance is under an invalid contract, the nature of any claims arising under such a contract must be assessed under the provisions of the Civil Code on unjust enrichment. Since the legal assessment of the claim is the task of the court which is to decide, it is incumbent on the court, if it concludes that the claim for repayment of the principal of the loan and its accessories cannot be based on a valid contract, to recharacterise the legal assessment of the claim as a claim for unjust enrichment which the consumer has obtained by actually receiving the funds constituting the principal of the loan.

However, there is a point at which it is not appropriate to leave the whole recharacterisation to the discretion of the court, but to guard and, where appropriate, correct the key parameters of that change in the legal nature of the claim so that the claim, already weakened by the nullity of the contract, does not suffer further unnecessary prejudice. In the following paragraphs, we will attempt to outline the key issues that the prudent claimant should beware of in this situation.

Default and interest

Obviously, a lender can forget about contractually agreed interest on a loan. Nor can the usual lending rate of interest be considered, since in this case the money lent is not viewed as a contractual obligation at all.

Even in the case of unjust enrichment, however, it is a monetary benefit on which, in the event of default in repayment, interest on late payment may be claimed at the statutory rate. This is a matter which the court should, in particular, take into account of its own motion.

Particularly in the case of large loans, the question from what point in time default interest can be claimed may play an interesting role in terms of the total amount that the creditor will still be able to recover in this situation.

In general terms, unjust enrichment is payable following a demand for its recovery by the creditor, which may be made at any time after it has arisen. The debtor is thus in default if he fails to comply with such a demand. At first sight, it would appear that interest on late payment could not be awarded at all in cases of unjust enrichment construed in this way, since, of course, the direct demand for the unjust enrichment could not have been part of the relationship between the creditor and the debtor.

However, this need not always be the case. Since the elements of a demand for payment of a pecuniary obligation are not specifically defined in law, we must look at them in the light of the general requirements for the effects of a legal transaction. There is no reason, however, why, if the original demand for repayment of the loan clearly states who the parties to the obligation are and who is to pay a certain sum of money to whom, that demand cannot continue to be regarded as an effective demand for repayment of the money at issue in the proceedings simply because the legal basis for that monetary claim has been recharacterised.  In addition, when a claim is recharacterised as unjust enrichment, it cannot, by its nature, be for a higher amount than that originally repaid under the loan agreement, nor can such a demand for unjust enrichment be premature in time.

In the alternative, it is not detrimental to draw the court's attention to the effects of the repayment of unjust enrichment also on the basis of a pre-action demand for performance, if it was sent separately before the action was brought or, at the latest, on the basis of service of a copy of the action on the defendant

Statute of limitations

In the context of a dispute recharacterised as unjust enrichment, it is to be expected that the defendant consumer may raise a statute of limitations objection in view of the earlier start of the limitation period. In the case of unjust enrichment, it is almost certain that the subjective and objective limitation period began to run as soon as the funds were actually provided. In the case of funds granted while the Commercial Code was still in force,[8] the shorter three-year limitation period for unjust enrichment than the four-year limitation period for a loan obligation also plays a role.

In such a case, an implicit acknowledgement of the debt by way of partial performance may come into play. If the consumer pays at least some of the (apparent) principal instalments of the loan after the funds have been granted, it is normally appropriate to infer that he has paid them because he acknowledges the existence of the principal owed as such. Again, there is no reason to treat that de facto acknowledgement differently merely because the principal owed ceases to have the character of credit principal and takes on the character of unjust enrichment. In many cases it can thus be effectively argued that a new limitation period runs from the last such instalment.

Claims for the repayment of funds originally intended as recurrent loans, in particular credit card products or overdraft facilities set up on current accounts as authorised overdrafts, are of a specific nature in terms of the calculation of the limitation period. In the event of a limitation objection being raised, it is then important to make it clear to the court that, in the case of those claims, it is clear from the way in which those funds were provided and paid on an ongoing basis that the unjust enrichment could only arise from the money which was provided to the consumer last, up to the amount of the unjust enrichment. The limitation period could therefore only start to run when those last funds were provided on the basis of the invalid credit agreement.

Claims for fees

In the context of the conversion of a claim to unjust enrichment, it is usually assumed that the creditor is only entitled to the 'bare' principal of the funds provided, net of any payments made by the consumer, with a maximum of statutory default interest.

This need not be the case if, even under this legal qualification, the creditor can effectively claim at least some of the fees charged to the consumer. It is clear that the nullity of the credit agreement will have an adverse impact on those charges which are directly linked by their nature to the management and charging of the credit as a separate banking product, i.e. in particular charges for the maintenance of a separate credit account, charges for reminders to pay the credit.

By contrast, particularly in the case of credit card products or overdraft facilities, which are usually linked as a supplementary product to an existing account, there is no reason why the invalidity of the credit agreement itself should result in the termination of the right to fees associated with the maintenance of the account itself, or for the maintenance of other services on the account or the sending of account statements.

These fees are usually included in the original loan principal as part of the negotiation technique for these loan products. However, they are not in the nature of a loan commitment but a (current) account commitment. There is therefore no reason why the possible invalidity of the credit agreement should extend to these charges.

In this connection, it should not be forgotten that the debt on the fees is a debt for money like any other debt and that statutory default interest may be claimed on those amounts, even though they are not part of the principal of the loan.