The Court of Justice of the European Union, issued a preliminary ruling Thursday stating that Polish courts could strike out language in foreign-held mortgage contracts that unfairly used currency exchange rates to disadvantage borrowers, even if doing so would completely annul the mortgage contract.
In 2008 two Polish borrowers, Kamil Dziubak and Justyna Dziubak, signed for a variable-rate mortgage from Austria-based Raiffeisen Bank. The loan advance was paid in Polish Złotys, but the payments were due in Swiss Francs indexed monthly on the due date of the payment. As a result, the payments could vary each month based on the exchange rate between Złotys and Francs set by the bank. The Dziubaks asked the Polish regional court to strike out the currency exchange portions of their mortgage, alleging that the exchange rates were determined solely by the bank and could therefore be abused to artificially inflate the repayments that the borrowers owed. The Polish court determined that the terms were indeed unfair to the borrowers but could not decide if it was proper to modify the terms of the contract or to cancel it completely and asked the EU court to weigh in on the issue.
The Court of Justice determined that it would be counter to EU and Polish law for the lower court to modify the contract to substitute more fair terms for the illegal currency exchange sections and that it should instead annul the contract in its entirety. In its full judgment, the court determined that substitution was impossible in the case because contract terms that are permitted to be substituted are codified and “are presumed to reflect the balance that the national legislature wished to establish between the rights and obligations” of borrowers and lenders. In the court’s view, it would be improper for the court to impose their own modifications beyond those that the country’s legislature provided. Since Polish law does not contain any workable substitutions to the currency exchange section of the mortgage contract, modification was not permitted and a wholesale removal of the section in question was the only permissible outcome. However, after abandoning the sections indexing the repayments to the Franc exchange rate the contract became a “legal impossibility” since the variable interest rate of the loan was also tied to the Franc index rate. As a result, the EU court held that the Polish court could choose to annul the contract in its entirety as a result of the removal of the currency exchange provision.