European court ruling on car loan revocation 'will open route to mass claims'

The decision is likely to lead to mass litigation cases on behalf of consumers affected by similar agreements, according to litigation experts from Pinsent Masons, the law firm behind Out-Law.

Ruling in three conjoined cases brought against financing banks of several major car manufacturers, the CJEU said mandatory information relating to default interest rates was missing from loan documentation.

Although the documents stated that the customers were unable to revoke the loan more than 14 days after it had been taken out, the missing information meant the loan agreement did not comply with EU consumer protection law and the revocation period had not begun.

Accordingly, the consumers are able to revoke the loans, according to reporting from Fitch.

Litigation expert Carlo Schick of Pinsent Masons said the ruling may open the floodgates to a large number of mass claims.

“From our experience with mass claims in the past, we know that in the coming weeks and months, intensive advertising campaigns by consumer law firms and litigation financiers on the topic of revoking automobile loan contracts are to be expected. As a result, we expect to see a rapid increase in the number of revocation declarations by consumers,” Schick said.

Schick said the judgment was likely to have a wide impact:

“Although the ruling was issued on loan agreements for car purchases, we believe many German consumers will argue that it is transferable to a large number of consumer loan agreements that have been concluded since the relevant EU directive was implemented to German law in 2010.”

Dispute resolution expert Christian Schmidt of Pinsent Masons advised affected businesses to evaluate potential economic consequences of the CJEU ruling promptly: “Financial institutions that have concluded a large number of consumer loan agreements should take the CJEU's decision as an opportunity to immediately subject the contractual clauses used in the past to a legal assessment and then develop an appropriate strategy for dealing with expected declarations of revocation.”

Schmidt also pointed out why the immediate consideration of possibly upcoming loan revocations is indispensable for the financial planning of affected financial institutions. “In order to set aside sufficient provisions in a timely manner, it is essential that affected financial institutions promptly identify the number of legally risky contracts and subsequently evaluate potential economic consequences,” Schmidt said.

The CJEU also eliminated the possibility for banks to avert the revocation of affected contracts by raising the objection of a violation of good faith: Banks cannot invoke the objection of forfeiture or an abuse of the right of revocation in the case of revocation declarations due to incomplete information provided to the consumer.

Schick: "The CJEU's decision significantly restricts the lender's legal options for defence against consumer requests for revocation. In particular, the exclusion of the defence of forfeiture could open up revocation options for consumers even for credit agreements for which the conclusion dates back a long time and the content of which was amended or changed during the term of the agreement."

According to Schmidt, the ruling has direct implications not only for the revocation of the consumer loan agreement but also for the purchase agreement concluded in connection with the loan agreement: "Since the credit and purchase agreements are linked, the revocation of the credit agreement also results in a simultaneous obligation for the bank to take back the financed object. Also with this regard resources must be created in good time in order to be able to meet corresponding obligations and create opportunities for liquidation."

Since the unprepared confrontation with mass claims often poses major challenges to affected companies and exposes them to financial risks, the timely initiation of preparatory measures is particularly important, said Schick: “Internal guidelines for the handling of various contract constellations must be developed and sufficient internal and external resources must be acquired in good time to ensure that complaints are handled professionally and that the affected contractual relationships are settled quickly in an economically sensible manner”.