Jurisprudence - Spain

Clause on abusive default interest rates on unsecured loans

Civil Chamber of the Supreme Court (Spain). Ruling 3829/2015, 8th September 2015

The Supreme Court (Tribunal Supremo) handed down this ruling in an appeal case regarding the abusive nature of the clause in an unsecured loan contract allowing un-negotiated arrears interest rates. The Civil Chamber had already ruled on this matter in its Ruling 265/2015, 22 April, and the Supreme Court upheld its arguments.

The litigation regarded whether or not the clause fixing the arrears interest rate at 20% above the applicable remuneration interest rate was abusive or not. Taking into account that the annual remuneration interest rate was 9%, the arrears rate would, initially, be equivalent to 29% and after the first review, could be over 30%.

The Chamber considered an arrears interest rate to be abusive if it entailed an increase of over 2% above the remuneration interest rate negotiated for an unsecured loan. In line with the doctrine established by the European Court of Justice, the Chamber resolved to declare the clause null and void, allowing the rest of the loan contract to remain in force with no other change.

Abusive nature of the arrears interest rate

When assessing the abusive nature of the clause, the ruling refers to the jurisprudence laid down by the ECJ and the Community directive 1993/13 EEC, which establishes the concept of abusiveness and the consequences of recognising such abusiveness. Thus, any clause leading to a significant imbalance between the rights and obligations of the parties to a contract, to the detriment of the consumer, can be considered to be abusive. Consequently, the Supreme Court considers it vital to assess whether there is proportionality between the breach and the association compensation payment. In this sense, the ECJ lays down guidelines under which the national judge must firstly assess on the basis of domestic law whether the content of the contract leaves the consumer in a less favourable situation that established by law. Secondly, the judge must analyse whether it is likely that the consumer would have accepted such a clause had it been agreed on the basis of individual negotiation.

The Civil Chamber, after analysing the Spanish legal provisions regulating arrears interest (the Civil Code, the Law on Consumer Credit Contracts, the Mortgage Law, the Law of Civil Proceedings, etc), determined that in the case of unsecured loans, the arrears interest established in clauses that have not been negotiated must not be very high, given that the basic remuneration interest is already high as the loan is not secured by collateral. The Civil Chamber reiterated that a 2% arrears interest is the most suitable for unsecured loans taken out by individuals, as it prevents the arrears interest from being lower than the basic remuneration interest, establishes indemnity proportional to the damages suffered from non-compliance with the obligation and, finally, act to dissuade borrowers from stopping their regular loan repayment. A higher surcharge than two percentage points would be unjustifiedly higher than the kind of arrears interest rates reflected in the domestic law analysed.

Consequence of the annulment of the abusive clause

The ECJ also ruled on the consequences that should stem from recognition of an abusively high arrears interest rate. Here, the Civil Chamber ruling refers to European jurisdiction under which national judges should leave the abusive clause null and void, without being able to modify its content. In this manner, the contract remains in force with no modification but the elimination of the clause, provided that the contract is still legally enforceable under the local legislation.